Production Decline—Significant Sign for the Future
P.J. Rathwell, Extension Ag Economist

Feedlot placements have fallen off dramatically during the summer of 2002.  This decline leads us to speculate that available fed-cattle supplies will be considerably smaller in the fall of this year.  Figure 1 shows USDA’s feedlot placement figures for this year compared to 2001 and the average of the last five years.  Cattle placed on feed in July were 16 percent below the level of placements in 2001 and August placements were 6 percent below August 2001.  All indications are that this pattern will continue through the rest of the year. 

The net result of this decline in placements is the potential drop in beef production from current levels through the end of the year.  After setting new weekly average production records in June and July, production could decline at a record pace during the fall and winter months of 2002.  In fact, Cattle-Fax’s projections indicate one of the largest declines in total beef production from the third quarter to the fourth quarter in terms of tonnage of beef produced.  Fourth quarter production is expected to be 6 to 7 percent smaller than third quarter production, which could be the largest drop in beef production in over 20 years.  Figure 2 graphically reflects this potential decline in beef production.  Average production is expected to decline about 60 million pounds per week from June to December. 

This expected decline in weekly beef production will support fed-cattle prices during the coming months.  In other years in which the market has experienced similar production declines, fed-cattle prices have increased substantially from the third quarter into the fourth quarter.  Cattle-Fax has calculated that on average fed cattle prices have been over $4 per cwt. higher during the fourth quarter during these years when compared to a 10-year average of only $1.50 per cwt.

Carcass weights now become the focus for the amount of beef produced on a weekly basis.  Today, steer carcasses are averaging 865 pounds, up 21 pounds from this time last year (each additional pound of carcass add the equivalent of 1000 head a week to the slaughter mix).  This would add 81,000 extra animals to the mix in August or about 70 million extra pounds of beef (hot carcass weight).

Is there anything that can stop this increasing carcass weight problem?  Higher corn prices, smaller carryover supplies and the return to profitability in the feeding sector should help reduce carcass weights during the fourth quarter.  This event is most likely to occur during the month of October.  Profits are returning to the feedlot sector.  And, increasing corn prices will certainly reduce days on feed and the month to month feedlot inventory carry over.

On the demand side, beef prices have remained fairly strong given the very large total red meat and poultry supplies available in the domestic market this year.  Total meat supplies are up 4 percent from the record levels of the past two years.  A weaker export market and weaker US economy are placing additional downward pressure on meat prices.

This strong demand at retail has supported fed-cattle prices.  Even though prices this summer are the lowest since the late 1990’s, prices are expected to average near $70 per cwt this fall and possibly move into the low $70 by spring.

Lightweight cattle prices are largely a function of fed cattle prices and the cost of grain.  Each dollar increase in fed cattle prices adds about $1.50 per cwt to feeder cattle prices.  Conversely each $0.25 increase in grain prices results in about a $1.50 per cwt. decline in yearling prices.  Lightweight cattle prices in July and August have averaged about $15 per cwt below a year earlier as drought and feed cost uncertainties increased and feedlot experienced red ink.

The last time corn prices moved up sharply in 1995/96, feeder cattle prices moved down into the upper $50’s per cwt as prices were forced down to offset the higher feed costs.  While this year’s corn price increase in not expected to come close to the 1995/96 record, drought and poor forage conditions may continue to force cattle off pastures and into feedlots—this would put pressure on feeder cattle prices.  Rising fed cattle prices will likely offset most of this corn pressure but fall pasture potential is becoming a key to any sustained feeder and calf fall price increase.

In summary the impact of smaller fed-beef production may be tempered to a degree by large competing meat supplies later in the year.  However, the supply decline alone suggests a solid upper $60’s average late in 2002.  This will help support Carolina calf prices in the fall.