| OU 358 | May 23, 2001 |
Summer Cattle Outlook: 2001
P.J. Rathwell, Extension Ag. Economist
The long-term outlook still appears bright for the cattle industry. However, the expected summer bulge in fed cattle supplies is real and occurring right now. Record feedlot harvest levels are necessary to keep fall feeder prices strong.
Severe winter weather in feeding areas and the resulting poor animal performance have limited beef supplies this spring. Slaughter levels must increase to avoid continued large beef supplies.
Cattle Fax reports that slaughter levels are approaching year-ago levels for the first time this year. Cattle slaughter totaled 724,000 head this week versus 712,000 head the same week a year ago. Cattle slaughter had been running 34,000 head per week below 2000 levels.
Beef demand has picked up over the last month. Couple this with improved packer profit levels and willing feedlot sellers and harvest levels will increase. If slaughter can remain near the 700,000 head level and carcass weights don’t increase (i.e., go over a 775-pound average) production will approach 500 million pounds per week. This will clear our feedlot inventory problem this summer—what the cattle industry has needed for the last three years.
USDA’s May 1, 2001 7-state cattle-on-feed report, strengthens this scenario. Placements in April were 10% below last year’s level. Lower placements mean fewer cattle in the marketing channel later this year. And, with fewer calves born in 2001, feedlots will not have the animals to place this year that they had last year.
The downside to this supply fix is that a 500 million pound per week production rate will pressure fed prices. Currently (May 22, 2001) June and August live cattle futures are trading in the mid to low $70’s. The October contract is near $75 per cwt. This level of live cattle futures is considered high, given current feedlot inventory numbers. It is likely that live cattle prices will return to the low $70’s before summer is completed.
In the Carolina’s, the live cattle market does seems relevant since we are primarily lightweight calf producers. But, live 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 or live cattle. This relationship is called the feeder to fed cattle margin. 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 the 500-pound calves that we sell in the Carolinas (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 an estimate price for 500-pound calves by watching the Chicago Mercantile Exchange (CME) live cattle futures contracts. For example, if live cattle futures are trading at $74 per cwt. for October 2001 and the feeder to fed margin is currently $15, we can expect October feeder cattle to trade in the upper eighties (and in fact they are—CME October feeder futures are trading near $90 per cwt.
What should we expect 500-pound steer calves to bring this fall? Using the calf to feeder margin of $10 per cwt. the futures market is suggesting that this weight calf would bring in the upper $90’s in the fall of 2001. Current cash prices for cattle weighing between 400 and 500 pounds range between $97 and $103 per cwt. for medium to large frame No.1 steer calves, Figure 1.
Feeder cattle and feeder calf prices continue to trade steady to slightly higher, due in large part to the rain in the southern plains and parts of the Deep South. If it does not continue to rain, these small increases in feeder cattle prices are likely to weaken. Most of the south is still in a severe drought. And, lightweight calf prices will be affected as producers are forced to move calves early.
On the other side of the coin this might be an opportunity for buyers of lightweight calves. There has been light contracting of calves for fall delivery to date. Most cow/calf operations are pricing cattle nearly $5 per cwt. above 2000 levels. I expect that this premium is for “reputation cattle”---most buyers, given weather conditions, are likely to wait and take their chances later in the summer or fall.
If the drier areas of the southeast don’t get some drought relief, I encourage you to evaluate your herds. Producers need to take advantage of high prices to cull their herds. Also with low grain prices expected again this year, producers should evaluate retained ownership opportunities. It might be profitable to send lightweight calves west avoiding the drought and capturing the value of cheap corn and a stronger winter live cattle market.
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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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