Outlook Update 309

OU 309

July 29, 1996

SOUTH CAROLINA BEEF CATTLE OUTLOOK: 1996 SEASON

P.J. Rathwell and C.E. Curtis, Jr.
Extension Ag Economists

Cattle producers are wondering when the industry will return to a time of decent prices and profits. By all indications the chances of this happening soon are not very large. The USDA indicates (July 1, 1996 cattle inventory report) that US cattle numbers are currently one percent lower than in July 1995. This is encouraging news but is it enough to help cattle producers in 1996? Let's look at some of the economic signals that are affecting the cattle industry and attempt to answer this question.

BEEF SUPPLY SITUATION

The U.S. cattle industry has shown steady growth in the numbers of cattle and calves on ranches and farms since the early part of the 1990's. On January 1, 1996 the U.S. cattle inventory was estimated to be 103.8 million head of all cattle and calves, up 1 percent from 1995 (Table 1). Beef cow inventory was 35.3 million head, up one percent from 1995's level. The 1995 calf crop estimate was up 2 percent over 1994's calf crop at 40.3 million head. The 1996 crop is expected to be 1 percent higher than 1995's.

Table 1.  1996 U.S. Cattle Inventory and Slaughter Estimates--Million Head
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                 INVENTORY                   SLAUGHTER        BEEF PRODUCTION
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Year |  Total    Beef Cow     Calf Crop |   Total    Cows   |   (Billion lbs.) 
-----|----------------------------------|-------------------|-----------------
     |                                  |                   |
1990 |  95.8      32.5        38.6      |   33.2      5.9   |       22.6
1991 |  96.4      32.5        38.6      |   32.7      5.6   |       22.8
1992 |  97.6      33.0        38.9      |   32.9      5.8   |       23.0
1993 |  99.2      33.4        39.4      |   33.3      6.1   |       22.9
1994 |  101.0     34.7        40.1      |   34.2      5.9   |       24.3
1995 |  102.8     35.2        40.3      |   35.5      6.3   |       25.1
1996*|  103.8     35.3        40.5      |   37.4      7.3   |       25.6
1997*|  101.7     34.1        39.5      |   37.4      7.4   |       25.8
1998*|  98.8      32.5        38.0      |   36.2      7.0   |       25.0
1999*|  97.0      31.7        37.1      |   34.6      6.4   |       24.1
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*Estimates

These numbers suggest that beef production will continue to increase in 1996 peaking in 1997 at 25.8 billion pounds. Cow slaughter estimates suggest that the kill rate will need to increase substantially in order to reduce the number of females capable of calving. These estimates suggest that the level of cow slaughter will continue to be high through 1998.

Cow slaughter is an important factor to watch as we attempt to estimate when the cattle cycle will turn around. The level of cows slaughtered and calf prices are very closely tied together. When cow slaughter is high producers generally are not making a profit and they are reducing the size of their cow herd. This in turn will reduce the size of the calf crop. A reduction in the calf crop will reduce the amount of beef supply in the market place and eventually filter back to the cow-calf producer in the form of higher prices for their calves.

BEEF DEMAND SITUATION

Total U.S. per capita meat consumption has shown a small increase during the last ten years. Per capita consumption of pork has increased slightly during this time, while chicken consumption has increased approximately 35 percent. Beef's market share during this same time period compared with other meats has declined 20 percent. In 1993 the trend in beef consumption reversed as the size of the beef herd increased. Per capita beef consumption increased at a modest annual rate of 2 percent. This level of growth is expected to continue through most of the rest of the decade. And, it will be necessary to clear the market of the large supply of beef that will be available. The retail price of beef must also come down in comparison to pork and poultry for this market clearing action to take place.

U.S. beef exports have been the bright spot in the demand picture for beef. Over the last decade, exports have increased significantly, going from 328 million pounds to 1.6 billion pounds annually (391 percent). In fact, the U.S. is expected to be a net exporter of beef in 1995. Exports now account for about 7.5 percent of total U.S. annual beef production. This expansion in beef sales has provided much needed support to U.S. beef prices. Further expansion of exports during 1996 and beyond are likely to occur provided we can maintain favorable foreign trading conditions with our world partners.

Total beef imports, which are historically larger than exports, are down as larger domestic supplies continue to discourage imports. Live cattle imports are up slightly from Canada. Feeder imports from Mexico were 80 percent lower than in 1995. Increases in cow slaughter due to lower beef prices and lower farm profits are expected to continue to keep beef imports low during the liquidation phase of the beef cycle.

COST OF PRODUCTION

The cost of producing a calf in the Carolinas over the next few years is expected to rise. One major contributor to this increase in the cost of production will be fertilizer. The cost of a ton of fertilizer has increased by close to ten percent in 1995. It does not appear that fertilizer prices will fall in 1996; rather, it is very likely that they will continue to increase. Unfortunately, for cattle producers, fertilizer prices do not coincide with the beef cycle.

Cattle producers who supplement their cows or creep calves with grain will also feel a significant increase in feed prices throughout most of 1996. Corn prices have increased by as much as 50 percent over the 1994 level. The increase in corn price is also having an impact on the price of soybean meal and whole cottonseed. A large corn crop is needed in 1996 to make any true difference in corn prices since the stocks to usage ratio for corn is near an all time low. USDA is predicting a 9.12 billion bushel corn crop in 1996. This production level should keep corn prices near or slightly lower than that seen in 1995.

Most cattle producers will need to focus on improving forage and animal management, reducing stocking rates, seeking out alternative low-cost feedstuffs, or leasing additional pasture in order to reduce their cost of production and curtail additional losses. This scenario will likely be the rule and not the exception in 1996.

LONG-TERM VIEW

The outlook for the next few years in the cattle business is basically preprogramed today. The large cattle inventory level is creating a beef surplus. Until this over supply is removed producer returns will be small or negative. The best estimates suggest that it will be about two more years before returns will again be positive at the cow-calf level. Two reasons indicate that this is true.

First, the beef supply through 1998 is already fixed and on the ground. Calves born in 1996 will not impact the meat supply for about two years. This is based on the production cycle of the animal; 1996 born calves will be yearlings in 1997 and it will be 1998 before the majority of these calves would be slaughtered. Until cow slaughter increases (reduction in the calf factory) meat supplies will not fall.

Second, the history of cattle cycles indicates that it takes about eight to eleven years for the cycle to run its course. (Cycle being defined as the time between low points in cattle inventory numbers). We have seen five cycles since 1950. The start of the last cattle cycle is generally considered to be 1990 when total cattle numbers were estimated at 95.8 million head. The U.S. cattle inventory is now placed at 103.8 million head as of January 1, 1996. Based on this historical pattern, it will take another two to three years for this cycle to reach its low point.

PROSPECTS FOR 1996 PRICES

Calf prices in 1996 will depend on three factors: the supply of calves, the price of corn and the price of fat cattle. Each of these factors influence calf prices differently but all are major players in the market place. Slaughter cattle, feeder cattle, and calf prices fell sharply during 1995 in Carolina auction markets. Feeder cattle (750 lbs.+) in most regions of the country, traded at or below slaughter cattle during the last half of 1995 and into 1996. From the average of 1991-1993 prices of slaughter cattle have decreased about $10 per hundredweight, feeder cattle about $18-$20 per hundredweight, and calves about $25-$30 per hundredweight. Beef forecasters estimate that these prior price declines represent about 80-85 percent of the total decline in beef prices that will be realized during this cattle cycle.

Beef prices are expected to continue downward for most of 1996. Average 1996 slaughter cattle prices are expected to be 3-5 percent lower, feeder cattle 3-7 percent and calves 5-8 percent lower than in 1995. The 1996 price outlook is for slaughter cattle to average in the low $60's. Choice fed cattle (Midwest basis) were in the high $50's this Summer and recovered into the mid $60's due to lighter fed cattle supplies. Prices will remain in the mid $60's until the late Fall when they will likely drop into the lower $60's.

Feeder cattle prices have strengthened relatively little as fed cattle prices rose from early Spring levels. Feeder cattle prices are feeling the pressure of high grain prices. Feeder prices (750 lbs.) are expected to increase as fed cattle prices increase this fall; just how much again will depend upon corn prices, but they will likely be in the $50-$55 range in Carolina. Lighter weight calves (400 to 500 lbs.) will likely be in the $55- $60 range.

SUMMARY

An expanding U.S. cattle supply, minimal improvement in domestic beef demand, increasing cost of production, and lower beef prices will result in negative returns for the majority of Carolina cattle operators in 1996 and over the next few years. Most of the factors causing this negative outlook, excluding the cost of production, are largely beyond the control of individual cattle operators.

We have stopped building the cow herd and the liquidation phase is beginning. The stimulus initiating these two events is profitability or rather the "lack of it". Most Carolina cow-calf producers made money up until 1995. False expectations of a quick turn around in cattle inventory and a rapid rebound of cattle prices in the Spring of 1996 will only extend the length of the cycle.

Now is the time for forward thinking cattle producers to make changes in their cattle operations. Given that many of the forces driving this cycle are beyond the control of any single cattle producer, we must concentrate on those factors that we can control and do it now.

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