KAYS korner

Dec 3, 2010
Expand if you can

The continued strength of the feeder and fed cattle markets makes a mockery of claims that the market is “broken.” Just a month or so ago, some analysts were forecasting that fed cattle prices would fall to $90 per cwt. or go even lower. Yet cash prices topped $100 again the week before last and went even higher last week.

The market’s strength is all the proof one needs to realize that supply and demand fundamentals are hard at work and that the live cattle market is alive and well. Average prices the week before last were 21 percent higher than the same week last year. Meanwhile, prices for a 700- to 750-pound steer, basis Oklahoma City, were up 22.5 percent.

Given that the U.S. and North American herds continue to shrink, feeder cattle prices will be even higher next year. The U.S. herd on Jan. 1 is expected to be down as much as 1.5 million head from a year earlier. USDA forecasts a total of 92.55 million while private forecasts are as low as 92 million, versus 93.7 million head on Jan.1 this year. Add to this the declines in Canada’s and Mexico’s herds and my data reveal that North American numbers will have fallen by more than 6 million head, or 4.6 percent, in just three years.

The declines mean that cow/calf producers will be firmly in the driver’s seat for the next several years. It’s no surprise that CattleFax has forecast that cow/calf margins will be $80 per cow this year, $120 per cow next year, and $150 per cow in 2012. Producers so far have shown no signs of retaining heifers and expanding their herds. The opposite is the case. Cow slaughter so far this year is 4 percent higher than last year while fed heifer slaughter is up 3 percent. The 2010 U.S. calf crop is expected to be the smallest since 1950 and the total herd will be the smallest since 1958. Should modest heifer retention begin next year, it will take another three years before potentially larger numbers start showing up at feedlots and packing plants.

One impact of the declining numbers is that the U.S. is experiencing declining available beef supplies and will do so again in 2011. Domestic beef production so far this year is marginally higher than last year. But exports are larger than last year while imports are smaller. This means that total available beef supplies on a per capita basis this year and next will be the lowest in 60 years. They will be 57.8 pounds per person in 2011, versus 59.1 pounds this year and 61.1 pounds in 2009, according to USDA forecasts.

While the supply side of the market looks extremely positive, the demand side is also experiencing significant improvement. U.S. exports of beef cuts and variety meats January through September were up 17 percent in volume and up 27 percent in value. Exports into December remained stronger than expected and remain a key factor why packers are prepared to pay triple-digit prices for fed cattle. Incidentally, the value of exports in September equated to $151 per head, versus $118 a year earlier, according to the U.S. Meat Export Federation. That’s a good example of the importance of exports to the industry.

Domestic demand is looking stronger as well. Demand during the third quarter posted a 2.8 percent gain on the same quarter in 2009, according to analyst Andrew Gottschalk of HedgersEdge. com. Domestic beef sales still account for nearly 90 percent of total production, so demand at home is what will determine price levels going forward.

Meanwhile, global cattle numbers are flat, with the only increase of note being in Brazil. This means global beef production will decline slightly in 2011, says USDA. Yet global beef demand has bounced back from its battering in 2009. Numerous countries are clamoring for more beef. The European Union became a net importer in 2003 and now imports 500,000 metric tons per year. South Korea and Japan are buying more beef, China looms as a potential buyer, and the Middle East is a growing market for cuts.

Much has been written in recent months about the declining U.S. cattle numbers and how to encourage producers to expand their herds.

I can think of three ways to make producers feel more comfortable about the future: get USDA to withdraw and/ or rewrite its proposed rule on livestock and poultry marketing; persuade Congress to reform the Estate Tax; get the White House to end subsidies for ethanol production.

It’s clear that concerns about the future of livestock marketing arrangements and the likelihood of higher corn prices are creating uncertainty among producers.

However, they should not lose sight of the fundamentals that are driving the market. With North American and global beef demand likely to exceed supply, the message to cow/calf producers is clear: Expand your herds if you can. — Steve Kay (Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765- 1725. Kay’s Korner appears exclusively in WLJ.)