OU 365

August 5, 2002

FALL BEEF CATTLE OUTLOOK: 2002
P.J. Rathwell, Extension Ag Economist

Carolina cattle have gone through tough times in 2002 and the fall situation is making producers nervous. Prices this spring and summer were significantly below last year and a return to 2000 and 2001 price levels appear unlikely this fall. Average price across Carolina's auction markets for 4-5 weight steer calves is significantly below last year's price. Price expectations for fall sales as expressed through the October feeder cattle futures are near $77 per cwt. The "basis" for 4-5 weight calves in Carolina averages +$3 per cwt over the October feeder futures contract. Hence, today's futures market is estimating that a local cash market price for 4-5 weight Carolina calves to be near $80 in October. The price is $15 per cwt below what cattle producers received from local cash markets last year and $20 per cwt less than they received in 2000.

Several factors are influencing fall feeder calf price expectations but the biggest problem still lies in the feedlot sector of the marketing channel. Large slaughter cattle supplies and continued heavy carcass weights continue to pressure cattle and beef prices. Large spring feedlot placements of heavy weight feeder cattle will keep beef supplies up for the rest of the summer. And, the fact that carcass weights are increasing in their normal summer fashion can only signal record large beef supplies this summer. Record supplies suggest live cattle prices will remain in the low to mid-$60's for most of the summer. Beef supplies are projected to diminish in the fall but large supplies of pork and poultry will likely keep live cattle prices from going much over $70 per cwt.

The Live Cattle Supply Situation

Cattle slaughter was up about 1% in the spring quarter of 2002 over 2001. But average carcass weights were about 4% heavier than in 2001 resulting in a beef production increase of 5% over last year.

Large placements of heavier feeder cattle last winter and this spring will keep slaughter cattle supplies up through most of this summer. Hence, beef production will be 2 to 3 percent above the level of 2001 this summer. Live cattle prices are currently trading $5 to $7 per cwt below last summer's average of $70.

May and June placements as reported by USDA's Cattle-on-Feed report showed some positive long-term market influence. The report indicated that total placements for May and June were 2.23 and 1.6 million head, respectively---6 and 16 percent, respectively, below last year's record placements. The decline came in the lightweight categories. This decline in lightweight cattle placements coupled with prior months lightweight placements continue to suggest that fall feedlot inventories will be down significantly compare to the last two years (Tables 1 and 2).

Dry conditions in much of the Plains states and west (drought conditions are also returning to much of the Southeast) could again push cattle off pastures and into feedlots providing an additional boost to these summer placement levels. Continued drought could also affect the fall live cattle price projection of $70 per cwt. The potential of an increase in cow slaughter could also affect fall live cattle prices. If drought conditions continue look for fall live cattle prices to stay in the low $60's.

The "rumor mill" is saying that drought conditions are already forcing liquidation of the cowherds. USDA's data suggests that beef cow slaughter is down slightly over 2001's level (Table 3). Drought conditions (mainly the Great Plains and West) are forcing producers to cull their beef cowherd and weaning calves early. But it appears that these cows are not going to slaughter but are being shipped to parts of the county that still have grass. However, cow slaughter could still increase above last year's level if pasture conditions continue to deteriorate--today, we have reach this critical level.

Competing Meats

Broiler exports have run significantly below 2001 levels. The Russian embargo effectively reduced April and May broiler export levels by one-third. Some of this export impact was reduced with increased shipments to Mexico. But there is still not a permanent agreement between the U.S. and Russia on poultry inspections. And, until this agreement is reached, poultry exports to Russia will likely be small and volatile--not a good sign for beef producers.

Pork supply problems now appear to be manageable. Expectations for fourth quarter slaughter capacity problems have abated somewhat. Inventory levels are now projected to be below 28 million head in the fourth quarter. These numbers do suggest large pork supplies and continued low hog prices but nothing likely the problems hog producers witnessed in 1998.

Live Cattle Outlook

The decline in feedlot placements should lead to smaller live cattle supplies this fall. The word should is in bold type and underlined because the ability to predict movement through the feedlot has be less than good. The heavy weight cattle placed in the spring could be difficult to work smoothly out of the system---certainly given the current economic environment. And, carcass weights will continue to remain high. Likely outcome is summer beef production 4% above 2001 with fall quarter production closer to 2% above 2001.

Supplies this large suggests that live cattle prices will not climb above $70 this year. Fall quarter prices are more likely to trade in the high $60's--unless continued drought encourages lightweight calves into feedlots and increased cow slaughter.

Feeder Cattle and Calves Outlook

Feeder cattle traded in the mid $70's for most of the month of July. Low live cattle prices and continued feedlot loss expectations have kept feeder cattle prices down in 2002. The CME feeder cattle index is trading near $77. This index is down $5/cwt since the first of the year. Some additional softness in this feeder price is the result of a late June corn price rally. Dry weather could lead to additional weakness in feeder prices if it pushes more cattle off pastures into feedlots and if it pushes corn prices higher. December corn futures are trading currently in the $2.40 per bushel range. The "old rule of thumb" was that feeder cattle prices dropped about $2 per cwt for each $.25 per bushel in corn prices. If it is dry and the corn crop is terrible the downside on feeder cattle prices is the low $70's. On-the-other-hand, the outlook for fall feeders is closer to $80 per cwt-----assuming corn prices are reasonable and live cattle price strengthen.

Large equity losses in feedlots have severely impacted lightweight calf prices this year. And, expectations for fall price increases are driven by what is going on in the live cattle and feeder cattle segments of the market. Feeder cattle futures contracts for October are currently suggesting that 4-5 weight Carolina calves will be in the lower to mid $80's in the fall. This is likely a floor price with the possibility of a $2-$5 per cwt. price improve by this fall.

Summary---Factors to Watch

The factors for producers to watch as we approach fall sales are: weather conditions, on western and southern pastures and in corn producing areas; feedlot movement, placements versus marketings; and, the projected cost of feed for 2003--mainly the corn futures. Any significant move in anyone of these factors (or a combination of) could take $5 per cwt off the 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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