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January 31, 2000

RECORD CATTLE PRICES, BUTDROUGHT A THREAT

The nation's beefcow herd has been on the decline since 1996, but there are signsthat the industry may begin to shift to expansion later this yearor in 2001. On the other hand, the number of dairy cows has alreadyincreased modestly as a result of record milk prices and profitsin 1998 and early 1999. Beef supplies will drop modestly in thefirst-half of the year and sharply in the last-half of the year.With favorable demand due to a strong U.S. economy, fed cattleprices will likely average near-to-somewhat-above $70 for choicesteers this year. Feeder cattle and calf prices will also be verystrong, perhaps at record highs by late in the year.

The number of cattleand calves on January 1, 2000 was estimated at 98 million in theUSDA's January Cattle Inventory report, down 1 percentfrom last year's inventory. Beef cow numbers were down about 1percent, while milk cow numbers were up 1 percent. Since the peaknumbers on this cycle in 1996, the beef cow inventory is down5 percent. The number of beef heifers being retained to returnto herds was unchanged from year-previous levels. This means thatproducers have not yet shifted into an expansion mode, but canlikely maintain the size of the herd this year. On-feed numberscurrently show 11 percent more heifers in feedlots (7 states)in comparison to only 6 percent more steer calves. Apparently,producers have been more anxious to collect the high values forfeeder heifers as opposed to retaining them for expansion.

The 1999 calf cropwas estimated at 38.7 million head , only modestly smaller thanthe 1998 calf crop. Contributing to a somewhat larger than expectedcalf crop was the expansion in milk cows.

The number of steersand heifers available for slaughter in the first-half of 2000is down about 2 percent, and cow slaughter is expected to remainlow, so that first-half beef production is expected to be downa similar amount. Smaller supplies are expected in the secondquarter relative to the first quarter. Beef supplies will dropby greater amounts in the last-half of the year. The number ofcalves weighing under 500 pounds that will compose the last halfof the year slaughter is down 3 percent. Two additional factorsare expected to contribute to even greater production declines_ low cow slaughter and the possible beginning of heifer retentionfor expansion of the beef cow herd.

Several factors may still alterthe start of the beef cow expansion. The first is the questionof when producers will have sufficient incentive to begin retention.Brood cow operations had favorable returns in 1999, but 1998 returnswere modest. Has there been a long enough period of profits toconvince producers that there will be on-going profits? A secondimportant factor is feed prices and interest rates. Low pricedfeed over the past two years has been bid into higher prices forcalves and feeder cattle. Higher feed prices in 2000 would easefeeder prices and reduce incentives to expand. Interest ratesare higher than last year and will likely move higher in 2000,further pressuring feeder cattle prices. Finally, the questionof drought remains in the minds of producers from the East tothe Southern Plains. Continuation of drought conditions into thesummer would result in continued liquidation of cattle and calves.

Demand is also expected to be favorablein 2000, led by continued growth of incomes in the U.S. and favorableconsumption tendencies due to the popularity of the high proteindiet. On the negative side, however, will be weaker exports andmore imports as a result of smaller U.S. supplies and higher prices.

Fed cattle prices are expected toremain in the very high $60s in February, but move into the lower$70s by early spring. The normal seasonal decline in fed cattleprices in the summer is expected to be modest this year as suppliescontinue to move downward. Prices could return to the very high$60 for periods this summer. Late summer prices are expected tomove back above $70, with the last-quarter of 2000 finding pricesin the $70 to $74 range. An exception to this price pattern couldbe as a result of continued dryness in the center portion of thecountry which would stimulate more liquidation and marketing offeedlot cattle at lower weights as feed prices rise. For the year,fed cattle prices are expected to average $68 to $73 per hundredweight.

Calf and feeder cattle prices willbe sensitive to the potential for higher feed prices and higherinterest rates. While fed prices are going to be stronger, thismay not necessarily lead to higher calf and feeder prices. Calfand feeder cattle are expected to remain near late-1999 pricesin the first-half of 2000. If a normal crop develops next summerand fed cattle prices rise as expected, calf and feeder cattleprices will likely move to record high levels in late 2000.

The cattle industry is set for whatmay be a record high price year. However, the industry may bevulnerable to drought conditions and to higher interest rates.Of these two, higher feed prices will be most damaging to theprofit potential. Producers should have pricing strategies inmind to protect against higher feed prices.

Issued by Chris Hurt
Extension Economist
Purdue University

  

Department of Agricultural and Consumer Economics    College of Agricultural, Consumer and Environmental Sciences
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