Beef Industry Was Profitable
During 1999 As Demand Improved

By Colleen Schreiber

PHOENIX — The trend is looking up for cattle producers, and for a change all segments made a little money last year.

So said a team of Cattle-Fax analysts at the recent National Cattlemen's Beef Association annual meeting here.

Perhaps the most promising news they shared was a reported increase in demand for beef, the first upswing seen in 20 years. Analysts said the proof of increase in demand came from the fact that retail beef prices were higher in 1999 despite an increase in supply.

That improved demand in beef added an additional $3 cwt. to every fed steer sold in 1999, the analysts said, and cheap grain prices also contributed to the cattle industry's profits.

Topper Thorpe, Cattle-Fax executive vice president, opened the outlook discussion by relaying the long-term weather forecast. He did so in the absence of Art Douglas, the meteorologist who has been providing the weather forecasts for Cattle-Fax for the last 20 years. As prepared by Douglas and relayed by Thorpe the weather outlook was not particularly bright.

"In 1999 we had a very near miss as far as drouth in the midsections of the country," Thorpe told listeners. "In other areas we had drouth severe enough to create some problems, and those problems continue today."

The Palmer drouth index, which is an accumulation of moisture conditions over an extended time, in December showed a significant portion of the country still very dry, Thorpe said.

"This raises some real concerns as we think about going into the crop production year for 2000," he added.

The La Niña weather pattern in place today, he noted, is holding true to form and expected to continue. The Southwest will experience above normal temperatures through the spring while the bulk of the country will be below normal.

As for moisture, Thorpe said the bulk of the country will be normal or below normal. Through the summer the midsection of the country should be in a little better situation, but Texas and much of the Southwest will remain below normal. Overall, the Palmer Drouth Analog forecast for 2000 shows a good portion of the country to be very dry.

"Texas and the Southwest and the western part of the Cornbelt are predicted to be dry and most vulnerable," Thorpe said. "This raises concern for crop production in the Midwest. If we go into the summer without good subsurface moisture, that increases the odds of a poor crop. Poor crops suggests higher prices, which we know has a direct impact on the price and value of cattle. This is a situation we want to continue to monitor closely."

On a positive note, Thorpe said there has been some discussion about the country moving back into an El Niño situation, which would be a shift of moisture to the Southwest, but that shift will be at least another year in coming.

"The average time between El Niños is between four and five years. Art feels that by 2001, probably late in the year, there is a real strong possibility that we will go back into an El Niño."

Dave Weaber, director of research and special projects for Cattle-Fax, discussed the impact of cattle numbers, beef supply and total meat supplies.

"In 1975 we had record cattle inventories," Weaber noted. "Since then, total inventory has declined by about 25 percent or about 34 or 35 million head."

Heifer slaughter approached 12 million head, the largest on record. It's that heifer and cow liquidation, which has been in place for the last four years, he noted, that was responsible for a major portion of the increased beef production.

"The large number of heifers that went into feedyards last year was the third largest percentage in our data set at about 36.2 percent," Weaber said. "We expect a one to two percent decline in 2000 and further declines as we start to expand the cow herd, but we have yet to see the expansion."

Total cow numbers are near cycle lows. There has been a slight uptick in inventories, however, largely due to a limited dairy cow herd expansion, Weaber said.

"Dairymen were extremely profitable through late 1998-99. Dairy heifer replacement values were extremely high and there is quite a demand for them and still quite a few in the country.

"We expect to see about 150,000 to 160,000 more of those in the country with about 50,000 to 60,000 in beef cattle," he continued. "So that gives us a net increase of about 100,000 head in total cow numbers. We're expecting a slight increase into next year and we should be approaching 44 million head as we go into 2004."

Weaber talked about structural changes in feeder and stocker operations which have impacted the industry.

"We've seen fewer and fewer stocker operators in the country. In the 1980s we had a huge stockpile of calves running on grazing programs. As the industry grew and expanded, the draw for those calves has been greater over time," he explained. "The utilization of those calves last year was record large. This drives feeder cattle and calf prices higher."

The analyst said one way the industry might expand feeder cattle and calf supplies is through imports.

"Mexican feeder cattle imports were up about 35 percent in 1999. That will continue to grow," he insisted. "We're right around 950,000 head now and we'll probably be at a little over a million head next year."

Overall fed cattle slaughter was record large last year, up nearly a million head, approaching 30 million head in total. Weaber told the audience that the industry can expect to see significant declines in cattle slaughter in the next couple of years due to smaller calf crops, smaller feeder cattle and calf supplies, and the limited ability to import cattle from Canada.

Besides record slaughter numbers, heavy carcass weights also contributed significantly to the record beef production.

"Average carcass weights since 1975 have been on a pretty good uptrend, about six pounds per year," Weaber said. "This led in 1999 to record beef production per cow – at about 610 pounds, up 175 pounds since 1975."

He attributed that increase to the influence of exotic and Continental breeds, both as terminal sires and in the cow herd, as well as better nutrition and implant programs and "terrific" feeding weather in 1999.

"In 1999 we produced 26.39 billion pounds of beef. We had record net beef supplies, and when we count imports, it's amazing we did what we did. Beef production was up 2.5 percent and yet we saw a good rally in wholesale and retail beef prices."

Cattle-Fax analysts predict beef production to be about 25.7 billion pounds in 2000. Weaber warned listeners not to expect a big decrease in the first half of the year "as carcass weights are large and cattle on feed numbers are up eight percent."

Pork production next year is expected to be down two to three percent and poultry production numbers are expected to increase another four percent, a trend that has been in place for the last 20 years.

"When you combine pork, poultry and beef production, we see that total meat production in 2000 will be about the same as 1999, but it will be the smallest increase we've seen since the middle 1980s," Weaber remarked.

Mike Miller, director of cost and performance analysis, followed with a discussion on the demand side.

"For the first time in 20 years we saw a slight increase in beef demand as evidenced by the larger beef production totals and higher average retail beef prices," Miller told NCBA members. "It was not a large increase, but nonetheless, something very positive to talk about.

"We came out of 1998 with a fed market that averaged right about 62 cents for the year," he continued. "If I would have told you that we’re going to increase beef production by 2.5 percent or nearly 800 million pounds for the year, would you have believed me if I also said that fed cattle prices were going to be considerably higher? Probably not, but that’s exactly what we got done in 1999."

Miller offered a number of reasons for the improvement in demand. First and foremost, he said, was a tremendous domestic economy.

"There's a lot of consumer confidence, and consumers have shown a willingness over the last several years, particularly last year, to spend that money," he remarked.

Another factor is an increase in new convenient beef products brought on the market in the last 12 to 18 months as well as a simplification of the beef case and in some cases cooking suggestions and proper use methods right on the labels for the various cuts of beef.

Another factor that can't go unnoticed, Miller said, was the rebound of the Asian economies.

"Both Korea and Japan came back into the market and started buying those high-value middle meat cuts that they had gotten used to."

And finally, he said, the millennium party hype can't be ignored.

"We did get some demand kick from that."

Overall there was a tremendous move in wholesale beef prices from early spring into summer. Almost all the increase during those months, Miller noted, was due to choice middle meat demand.

"It’s not uncommon for us to see a slight increase in that demand, but it came on really strong and continued through late in the year. This is a trend that we expect to continue. We think the Choice-Select spread will remain wider than it has in the past."

The upswing in demand in 1999, Miller told listeners, added an additional $3 cwt. to every fed steer that was sold last year. The weekly average Choice cutout averaged $1.11 in 1999 and Cattle-Fax analysts predict that average will be slightly higher in the coming year, probably between $1.14 and $1.15. Miller said that suggests slightly higher fed cattle prices.

Since 1992, the industry has seen an increase of 14 percent in Choice loin values and a 12 percent increase in rib values, but chuck and round values, unfortunately, are 20 percent below 1992 levels.

"It’s a challenge but also an opportunity for our industry to continue to find a way to add value and convenience to those cuts," Miller noted.

Another bright statistic attributable to the improved demand relates to consumer spending on beef.

"U.S. consumers’ expenditure on beef was flat through the 1990s," the analyst noted. "During that time, we were adding additional pounds of beef to the domestic marketplace. We were increasing production, but we were having to lower prices to move that production through the system. That wasn't the case in 1999. Improved demand led to about a $2.5 billion increase in consumer spending on beef — a very good story."

Consumer expenditures on beef in 2000 are expected to decline again, but nearly all of that, Miller told the group, could be attributed to the decline in beef production.

As for the import-export scenario, Cattle-Fax expects both imports and exports to grow in 2000 with exports up about five percent and imports up closer to 10 percent.

"What we need to remember is that what we bring in to this country is typically lower valued cuts, trimmings and/or manufactured beef. We export nearly all of the higher valued cuts from the loin and the rib, so we're definitely a net winner when it comes to beef trade," he insisted.

As for feed grains, Miller echoed concerns about the weather.

"We had the fourth largest crop on record this last year at nearly 9.44 billion bushels. Really, we've had four years in a row of really excellent crops."

Additionally, last year the U.S. exported nearly two billion bushels, an increase of about 50 percent from the previous year, Miller noted. He said he expects about the same export levels again for 2000. Add to that the fact that domestic corn use is expected to be nearly 9.5 billion bushels, and that leaves no stockpile.

"Ultimately, what we end up with is a carryover about equal to what we had a year ago," Miller noted. "Back in the mid-1980s, we had a tremendous supply that meant we could withstand any kind of short crop without raising prices considerably. The carryover got really low in the middle 1990s and we had record high corn prices," he continued.

"The risk is that if we are using as much as we produced a year ago, and if we have any challenges with this year's crop, prices are going to have to move higher to ratchet demand.

"We are now entering the third year of the La Niña, and what we are suggesting is that we will have a higher probability of corn crop challenges in 2000 than we’ve had in recent years."

Current expectations for 2000 corn prices, Miller said, average right around $2.25 a bushel, basis Omaha, nearly 40 cents a bushel higher than last year's average.

Another factor to keep in mind, he told cattle producers, is that corn prices in 1999 were at 12-year lows.

"In the last 20 years we haven’t spent a lot of time below $2 a bushel, so really, corn prices could move somewhat higher, and it wouldn’t be abnormal at all."

Randy Black, director of market analysis, summarized some of the key points mentioned by previous speakers. He warned listeners that though things certainly look brighter than in previous years, to "keep things in perspective in 2000."

"We still have a lot of factors weighing on us in the short-term, including large numbers of cattle on feed and large beef production.

"We should see seasonal drop in production as we go into the spring," he continued. "If these weights don’t moderate, we may be a bit optimistic in what we’re predicting in production. These production levels may not get quite as small as we would like."

He talked about the profit opportunities recently for stocker operators.

"Two weeks ago we had one of the largest feeder cattle and calf movements since 1986. How can we do that with these kind of sharp reductions in feeder cattle and calf supplies? This industry will respond to economics time and time again, whether they’re good or not," Blach insisted. "I think we need to keep that in mind. If we continue to have profit opportunities, odds are we will place more cattle over this first quarter than what most of us really think are available out there."

The substantial increase in the number of lightweight cattle placed over the last four or five months, Blach said, suggests lighter carcass weights but also large fed cattle marketings starting sometime in April or May; that, he said, will continue right on through July.

"So a combination of record heavy weights, large cattle on feed numbers — I’d tell you today, when we look at our carryover, we’re at a pretty frightening level today. We have not seen marketings as aggressive as we would like to have seen over the last 30 days," Blach said.

Analysts predict a 40 percent carryover at the end for January.

"Everyone wants to be optimistic, but let's not forget how many cattle we have in these feedlots, how much work we have to do," he stressed. "We need to see some aggressive marketing over the next 60 days to put us in a position where we can see some of that seasonal drop in production levels in late spring."

Blach told listeners to expect a seasonal drawdown in cattle on feed numbers, with the smallest numbers coming sometime in August and September. The industry, he said, can expect fed cattle prices to average about $69 over the course of the year, and a range "for all practical purposes between $65 and $75."

The spring market, he said, will likely be in the $66-67 range as feedlots work through numbers. If the carryover is cleaned up, however, Blach said the market could potentially reach $72 to $73.

During the summer he predicted a fairly normal drop.

"Don’t be surprised if this market pulls back into the mid-$60s as we go into peak supplies in the summer."

He predicted further recovery in the second half of the year.

"We've seen some seasonality changes in the market over the course of the last two decades. Used to, we could count on highs in the market coming in the spring. However, in the last four or five years, those highs have actually come in the fourth quarter," Blach said.

"Used to, we saw the widest Choice-Select spread in June or July. Now it occurs in the fourth quarter when we get the big demand for middle meats. That widening Choice-Select spread has an impact on the seasonality of fed cattle prices," he noted.

Blach attributed much of the feeding industry profits in 1999 to breakeven levels.

"In 1998, breakevens mostly were in excess of $70 and we sold cattle for the most part at $62. We lost about $85 a head on average in 1998," Blach noted. "We’ve made about $50 a head back in 1999, so we’ve recouped about 65 percent of that lost equity over the course of the last 15 months."

However, he noted, breakevens have increased substantially, particularly in the last 60 days, with most in the $72 to $75 range. The odds of making money, he said, diminish with higher breakevens, and he suggested that feeders may want to consider taking steps to lay off some of the expected risk.

"The odds of making money have gotten to where they’re less than a flip of a coin," Blach insisted. "Historically, when we have breakevens below $65 there is a 75 to 85 percent chance that those cattle would make money as fed cattle.

"Hopefully, we will be in a situation that we will be able to throw that historical data on breakevens away if we get enough demand growth over the next several years to change some of those. But, we're not there yet."

Blach said Cattle-Fax anticipates that the industry will be able to sustain about two-thirds of the demand increase in 2000 that was experienced in 1999.

For the year in total, Blach told listeners the feeding industry can expect profits in the $20 to $25 a head range, about half of what was made last year, most of it likely coming in the first few months and thinner margins in the summer and fall.

Feeder cattle prices, Blach said, are expected to average $82 cwt. or about $84-85 basis CME. He told listeners that in all probability feeder prices have already topped out for the year. Additionally, Blach said to expect some pressure on feeder prices in March through about May.

The grain market, he warned, continues to be the wild card when making price forecasts.

"We've turned from lower trend to a higher trend over the last couple of weeks. Prices are 30 to 35 cents off their low today," he noted. "We expect another 20 to 25 cent upside price risk in corn prices between now and spring."

Weather patterns, he reminded, could add to price volatility.

"If we’re dry going into planting season, this grain market could get pretty waspy," Blach reiterated. "Keep in mind, a 50-cent increase in the grain market by itself will take $4 a hundred off the value of a 750 to 800-pound feeder steer."

Blach predicted $60 to $80 a head profits for winter grazing operations but not quite as good for summer stocker operators.

"If you haven’t bought cattle for summer grazing programs, expect those margins to be pretty thin this year. With calf prices pushing the top of a dollar today, I wouldn't expect to see more than $20 to $30 a head profit on summer grazing programs," he remarked.

The cow-calf industry, Blach said, experienced its first substantial year of profits since 1993. Calf prices, he said, are expected to average $95 to $96 cwt.

"Again, a 50-cent increase in corn prices has about a $7 cwt. impact on calf prices."

Bred cattle prices, Blach said, have also seen substantial appreciation in most areas with the exception of the drouthy region. Prices are expected to average about $800 a head with further appreciation in bred cow values over the next two to three years, particularly as the industry begins to see more enthusiasm for expansion. The two ingredients for enthusiasm for expansion, Blach noted, are profitability and green grass.

Market cow prices will be $5 to $6 cwt. higher.

"Don’t be surprised if we see quite a few cows trading in the mid-$40s, and as we move into 2001-2002 and cow slaughter declines even further, cow prices in the high $40s and low $50s."

He noted the importance of salvage cow values, saying that approximately 16 to 18 percent of the annual revenue in a cow-calf operation comes out of a slaughter cow.

"Manage her accordingly if you have the resources to," he told producers."

Finally, Blach predicted cow-calf operators will see profitability clear through 2004.

Blach used Cattle-Fax data to show the importance of being a high return producer versus an average cow-calf producer. Those average producers, he said, over the last 20 years lost about $1.45 a head while high return operators, on average, during that same period, made about $60 to $65 a head.

"Today we're talking about the average producer over the next several years making $60 to $70 to $80 a head," Blach remarked. "Those high return producers are looking at another $50 to $60 a head in excess of that."

Blach said because of excess feeding capacity, the record wide feeder-fed spreads that the industry has seen over the last three months will continue, keeping spreads between all classes of livestock quite wide.

Cow-calf producers, he stressed, will be in the driver's seat with the lion's share of the profits coming back to them. Margin operators, those in the feeding or stocker operations, will see shrinking margins as supplies continue to decline.

Thorpe concluded the outlook seminar by discussing other things that will impact profitability in the coming years. Among them are structural and technological changes, continued globalization and value-added products.

Concentration, Thorpe told listeners, is something that will continue in all areas of agriculture. The concentration in the beef packing industry, he pointed out, is not any greater than in other livestock commodities. For example, the top 20 broiler producers account for 85 percent of production. In the hog industry, seven percent of growers produce 70 percent of the industry's total production, while dairies with more than 500 cows, which account for seven percent of the producers, produce 60 percent of the milk.

And in the cattle feeding industry, feedlots with more than 1000 head, some 2100 or about two percent of all feedyards, market 85 percent of the fed cattle. In the cow-calf industry there are slightly over 800,000 operators and about 3.5 percent or 28,000 of them have more than 200 mother cows. They control about a third of all the cows in the country, Thorpe noted.

"We expect to see these trends continue."

Thorpe said the industry will likely see more business relationships between the various segments of the industry, which will affect everyone in all segments.

Technological advancements will be many. There will likely be new products that will increase production per animal, Thorpe noted.

"That's important, because it basically means we don't need as many cows as we've had in the past. We may not restock to previous levels because of this.

"We'll also see improvement in management tools. Look what the Internet and biotechnology have done."

Globalization will be key in the domestic arena because there are continued and growing efforts from South American countries to overcome hoof and mouth disease so they can be exporters of beef.

"We've already seen what they can do in terms of crop production and the impact they've had worldwide," Thorpe reminded. "We have to be ever more conscious about what happens around the world. Look at the Asian situation a few year ago and the significant decline in hide and offal and how that impacted us."

Value-added products, he noted, contributed to the strengthening in beef demand.

"If in fact we continue to add convenience to our product, particularly by precooking, this could significantly change production in the type of cattle that we produce."

Finally, Thorpe said, "Open your mind and recognize that we're in a rapidly changing business that is going to change at an even more rapid pace in the months and years to come."