| OU 357 | March 2, 2001 |
THE FIRST GUESS OF THE YEAR 2001
P.J. Rathwell, Extension Ag. Economist
The New Year is here and this year’s outlook for the cattle business is bright. And, it appears that this optimism will continue for several years. Record beef production levels will decline as we finally reach the bottom of this cattle cycle and start the rebuilding phase of the next cycle.
In the short-run, the winter-spring 2001 quarter, fed cattle supplies will be manageable but by May through July supplies will again reach record levels. The bottom line is that winter weather and the poor performance of the cattle in the feedlots have limited available fed cattle supplies and consequently beef production ---supporting fed cattle prices.
But, feed yard inventories are still large. Drought conditions sent many light weight calves into feed yards as opposed to wheat pasture. These calves will be ready for harvest during the early part of the summer. A similar situation occurred in the summer of 2000. The result was lower fed cattle prices. Exacerbating this problem in 2001 was the poor weather conditions in the major feeding areas. Supplies will likely be bunched again in the summer months of 2001 forcing fed cattle prices down.
The feedlot inventory problem will dampen prices but overall cattle prices will still be very good. If the industry can manage the summer supplies, Fall 2001 prices will likely rebound. The Chicago Mercantile Exchange live cattle futures market is saying just this. Live cattle contracts are trading at $71-$72 for the June and August contracts. October and December contracts are nearer the mid-seventies. Feeder cattle contracts are staying constant near the upper eighties. This suggests that even with large fed cattle supplies feedlot operators recognize the industry has smaller calf inventories and these feedlots are now saying that they are willing to bid prices up next fall.
The underlying factors remain strong. First, a smaller national calf crop and the start of the rebuilding phase of the new cattle cycle signals less animals available in 2001. Second, larger feedlot capacity will force feedlots to bid up feeder cattle prices to fill these lots. Third, even though corn prices are expected to increase in 2001, corn is still relatively inexpensive compared to a few years ago. (Note: the “old rule-of-thumb” said that for every $.10 per bushel increase in the price of corn feeder cattle prices declined by $0.75 per cwt.)
In the Carolina’s the fed cattle market seems far away since we are primarily producers of lightweight calves. But, fed cattle prices have a direct affect on feeder cattle prices. There is a
relationship between the price feedlots pay for feeder cattle and the price they receive for fed cattle. This relationship is called the feeder to fed cattle margin. (Feeder cattle prices on a per hundredweight basis are typically $5 to $10 above fed cattle prices.) Most producers in the Carolinas don’t produce 750-pound feeder cattle nor do they retain ownership of their calves through the feedlot. But this feeder to fed cattle margin still strongly influences calf prices.
Why? Because there is also a relationship between feeder cattle and 500-pound calves (you might call this the calf to feeder margin). In the Carolinas 500-pound calves are typically priced between $8 and $10 above feeder cattle. Knowing these two relationships, we can obtain a useful estimate of the expected 500-pound calf price by watching the CME live cattle futures contracts. For example, live cattle futures are trading at $76 per cwt. for December 2001. The feeder to fed margin has been at or above $10 for all of 2000 and is currently near $13 per cwt. Given this, we can expect December feeder cattle to trade in the upper eighties (and in fact they are— CME November/January feeder cattle futures are trading in the $88 to $89 per cwt. range). What should we expect 500-pound steer calves to bring this fall? Using the calf to feeder margin of $10 per cwt. we would expect this weight calf to bring in at least the high nineties.
The Impact of InventoryThe January 1, 2001 cattle inventory report estimates a one percent reduction in cattle and calves. In the United States as of January 1, 2001, total cattle and calves were estimated to be 97.3 million head, 1 percent below the 98.2 million estimated on January 1, 2000 and 2 percent below the 1999 estimated.
All cows and heifers that have calved were estimated to be 42.6 million head, down slightly from the 42.8 million head estimated in 2000. Beef cows were estimated at 33.4 million head, down 1 percent and milk cows, at 9.2 million head were up slightly.
All heifers 500-pounds and over were estimated at 19.8 million head up 1 percent. Beef replacement heifers were placed at 5.59 million head, up 2 percent. Milk replacement heifers were estimated at 4.05 million head up 1 percent. Other heifers (destined for feedlot placement) were estimated at 10.1, slightly lower than the 2000 level.
The combined total of calves under 500-pounds and other heifers and steers over 500-pounds outside of feedlots was estimated at 28.6 million head, down 4 percent from 2000. The 2000 calf crop was estimated at 38.6 million head, down slightly from both 1999 and 1998. Calves born during the first half of the year are estimated at 28.4 million head or about 74 percent of the annual calf crop.
This reduction in the cow and subsequent calf crop is significant for Carolina cattle producers. It plainly suggests that there are less beef animals and that means less beef available to the consuming public. Given smaller estimated increases in pork and poultry supplies in 2001 beef prices should have the ability to increase at the retail level and not significantly affect prices at the producer level.
Another important point to consider in the inventory numbers released by USDA is that this is the first year in the last four that beef replacement heifer numbers were expected to increase. This signals the end of the last cattle cycle and the start of the next. Beef cattle numbers will likely increase for the next few years.
This increase while signaling an increase in beef production in the long term also suggests profitable shorter-term profits for beef producers. The expansion of the beef herd will occur through producers saving heifers and not sending these animals to the feed yard. In the short run feed lots will have smaller numbers of animals to feed, thus curtailing beef production.
On the other hand, heifer retention means more calves and increases in future beef production. This suggests lower producer prices and returns in the future. When will this occur? The production cycle of the beef animal gives us some indication of when we can expect prices to turn lower. If a producer saved a spring heifer from the 2000 calf crop she would be bred at about 15 to 18 months of age. A cow’s gestation period is about 9.5 months. It will take another 14 to 20 months for this calf to grow, be finished and slaughtered. In total the impact of the producer’s decision to save a 2000 heifer and expand his herd will not likely be felt until some time in 2003 to early 2004.
Cattle producers have decided to rebuild the cattle herd. The cattle cycle is starting anew. Set your clocks, cattle producers should have good prices and returns for the next three years.
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Clemson University Cooperating with U.S. Department of Agriculture, South Carolina Counties, Extension Service, Clemson, South Carolina. Issued in Furtherance of Cooperative Extension Work in Agriculture and Home Economics, Acts of May 8 and June 30, 1914.
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