April 17, 2000
LIVESTOCK MARKETS HEAT UP
One of the mysteries of markets
is that you never get them totally figured out. Just when you
think they are behaving in the "proper manner" they
move to unexpected and unexplained levels. Current livestock markets
can seemingly be added to the "unexplained" category.
A year-ago, fed cattle prices were
$65 per hundred, and steer calves were selling in the eastern
corn belt for 90 cents a pound. This spring beef supplies are
nearly 5 percent higher and fed cattle have hit $74, and steer
calves are as high as $1.20 per pound. The spring is even more
remarkable for hogs. Pork supplies are down only 3 percent, yet
hog prices are at $50 per hundred compared to about $29 a year
ago. The feeder pig price spread is even more dramatic, $38 per
head a year-ago, and near $60 this year.
What's going on? Livestock producers
respond, "I don't know, but whatever it is I hope it continues
for a long time." The answers however are not as simple.
First, demand is white-hot, as demonstrated by cutout values for
both hogs and cattle. A year-ago pork carcass values were under
50 cents per pound, this year they are at 70 cents. Simply said,
consumers seem to be enjoying red meat once more, and without
quilt. Two factors are the most likely cause. One is the popular
Atkins or high protein diet. Recently I heard the TV testimony
of a movie star suggest that after trying every diet in the book
he had lost 30 pounds on the high protein/low carbohydrate diet....and
felt great. While the medical community has not come out in favor
of this dietary shift, the power of the highly visible stars seems
to be enough proof for many Americans.
More interest in red meats is not
enough, however, consumers also must have money in their pockets.
Here we have the general economy to thank as we extend the longest
period of positive economic growth in American history. A combination
of money in the pocket, and an enhanced image of red meats, is
about the best explanation that can be provided. In addition,
a warm March got the grilling season off to an early start this
The impact of strong livestock prices
will be reflected in sharply higher farm and ranch incomes than
has been anticipated by USDA. Clearly, both the cattle and hog
sectors have emerged from the farm recession of 1997 to 1999,
but what of the future?
The recent Cattle on Feed report
indicated that the number on feed was up 8 percent from last year.
This means that the number of fed cattle will likely increase
as we move into the late-spring and summer. Total placements in
March dropped by 1 percent as the pool of young cattle to go into
feedlots dwindles, but the number of cattle over 800 pounds placed
in feedlots were up 22 percent from last year. This sets up a
potential for increasing supplies of fed cattle this summer, but
with sharply smaller supplies by the fall.
Fed cattle prices are expected to
be at their spring highs at the current time, and begin to drop
shortly. Summer prices are expected to drop back into the higher
$60, with lows likely in July or August. Then, as smaller fed
supplies come to market in the fall, prices are expected to rebound,
and may very well make new yearly highs in the mid-$70s. The favorable
price period will likely continue into 2001 as new heifer retention
drops beef supplies further.
Hog prices should continue to improve
this spring and summer. Prices have risen more quickly than anticipated,
but the odds of further strength going into June remain high.
This means that summer highs in June could reach the $53 to $55
range, a level of huge profitability for hog producers. Fall prices
may be able to hold near the $45 level, with the likelihood for
profitable prices extended well in to 2001.
While the outlook for the livestock
sector has turned from dismal to daunting in the past year, there
remain several threats that will be watched closely. The first
is dry weather in the midwest. If drought conditions continue
into the summer, yield prospects will diminish and feed prices
will escalate further. Drought also reduces forage supplies and
forces increased cow slaughter along with lighter weight cattle
coming off feed. Initially, higher feed prices result in larger
beef and pork supplies and lower prices.
The second concern is with the strong
demand. The two components are improved consumer altitudes about
red meat consumption and high personal incomes. Interest rates
will continue to rise this summer, inflation is warming up, and
the extreme volatility in the stock market reflects increasing
economic uncertainty. These factors may result in consumers which
will be more cautious with their free spending of the recent past.
A final question is whether the high protein diet reflects a fundamental
change of consumer attitudes toward red meats, or is simply another
fad that fades with time.
The future is always clouded with
uncertainty, but at least the livestock industry is financially
recovering from the last two years when prices seemed unjustifiably
low, reflecting another period in which market prices were hard