| OU 340 | July 28, 1998 |
Southern cattlemen are concerned today about the current drought
and problems in the feeding segment of the cattle industry. Calf
prices have fallen significantly this summer and fall price projections
are now in doubt. Feedlot inventories are burdensome and finishing
weights are at record levels. What's happening in the industry?
Let's start with the feedlots. The large feedlot inventory
reflects what has happened within the industry in 1998. Large
supplies and placements of 1996-97 calves pushed feedlot inventories
to record levels. Everyone knew that it was going to be a chore
to market these animals and maintain reasonable prices. Nevertheless,
higher than normal pork and poultry supplies and the "Asian
Flu" and its effects on Asian currencies were not factored
into the equation. Demand for U.S. meat products in Asia slowed
significantly. Producers looked to the U.S. consumer to take this
surplus.
The U.S. demand for beef could not absorb these record levels
of meat supplies. Then came cheaper corn--the plague of the feeding
industry. Cheap corn always gives feedlots the false sense that
holding cattle off the market will drive up prices. Since corn
was cheaper, the cost of gain would be lower. Bargaining power
with the packers must surely improve because the feedlot is not
pressured to sell. Pleasant idea but it always backfires. Cattle
gain weight, yield grades suffer and the result is frequently
lower prices and returns, slower marketings and larger inventories
of heavier cattle.
Feedlot supplies are again forecast, starting in July, to drop below year-earlier levels. Lower 1997-98 winter/spring placements were recorded. Fewer cattle numbers should have reduced available beef supplies for the summer of 1998. But, many stocker calves destined for feedlot placement were held back due to poor price expectations and large feedyard inventories. May and June placements were up indicating that these winter pasture calves could wait no longer. May and June placements are 7 - 8% above last year and 12 to 20% respectively, above the five-year average placement level. Adding fuel to the fire is the fact that 68% of the cattle placed weighed over 700 pounds. Inventory levels that were being worked down are again under pressure with more cattle and placements at higher weights.
The solution to this problem is to clean up the large front end of feedlot inventories. Now estimates are that another two to three months is required to get this problem within a manageable range. Weekly slaughter levels of 700,000 or higher are needed through at least July and August to improve feedlot bargaining positions. Ample fed cattle supplies are expected to continue through the summer (and I contend that it will likely go into the fall). We will see continued record total meat supplies due to heavy carcass weights and large competing meat supplies this summer----the net result is continued pressure on fat cattle, feeder cattle and calf prices.
Compounding the feedlot problem for Southern cow-calf producers
is the drought. Weather conditions this spring and summer for
most of the Southeast has been disastrous. The drought in Texas
is well known. What effect can this have on the feeder and calf
markets? You are seeing it today (Figure 1).
Typically, we experience a seasonal drop in calf prices in April.
Prices decline and then regain some strength and decline again
as fall calf sales begins. This year, in April, prices started
down and they have continued to decline. Part of this decline
is due to the large beef supplies in U.S. feedlots but the steep
decline over the last month is directly related to the growing
drought problem.
Texas, and a large portion of the Southern Plains, rely on spring rainfall to get their pastures through the spring. This year, very little rainfall occurred during this time period. If it doesn't rain during the spring, additional rain is typically scarce until fall. Consequently, cattlemen are forced to sell calves and cows because pastures are gone. Hay supplementation is an expensive proposition, and given current weather forecasts, fall hay production is typically risky. The severity of the situation can be readily seen through increased cow sales in the Southern Plains.
Prices for feeder cattle and calves are also taking a beating
everywhere in the country. Most of the Midwest and West are seeing
calf prices $5 to $10 per cwt below expectations. Cattlemen in
these areas were expecting a reasonable price for their calves
after several years of poor prices. Instead, it is becoming more
likely that prices will fall considerably below expectations.
What is possible for Carolina cattle producers? If we don't have appreciable rain within the next month it is likely that prices will decline further. Early sales of light calves will occur and finally cattle producers will begin liquidating their cowherds. Cattlemen will have to face the critical decision of feeding their spring hay crop several months early -- hoping that they can make a fall hay cutting or that hay will be available for purchase this fall. Retained ownership of the calf crop is another possibility. Surely live cattle prices will have rebounded by the fall and winter months and maintaining ownership through the feedlot will be profitable.
This is a rather drastic scenario but it is becoming more likely
every day. Feedlot sales are not going to improve in the short-term
and who knows about the weather. Conditions in the southern plains
are closest to being a real disaster. Their early sale of calves
will increase calf volume before the normal fall marketing period.
Our cattle buyers are likely to capitalize on these "forced
sales." Carolina cattlemen should be thinking about what
actions they could take to help minimize these conditions. It
is time to check out alternative feed sources, consider planting
small grains or overseeding pastures for the fall and winter and
evaluating sales alternatives. The weather situation in the region
might turn around tomorrow. But, conditions here and in the rest
of the country are not likely to make a significant improvement
in this fall's price for our calves.
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