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By David Bowser OKLAHOMA CITY — Dr. Mike Sands, vice president of Sparks Commodities, says he's concerned about cattle prices in the near term, but overall, prices should favor cattlemen. "Between now and 2004, we are anticipating that the overall production levels will be off a little bit from this year," Sands says. "Slaughter may be off a couple of percentage points." He thinks that while numbers will be down, weights will be back up next year. Sands told the Oklahoma Cattlemen's Association at their annual meeting this month that he expects total cattle inventories to drop from 96.1 million head at the beginning of 2003, down to about 95.3 million head at the beginning of 2004. Sands expects that to be the bottom of the overall inventory slide. "We do anticipate heifer retention will begin to show up the latter part of this year," Sands said. Total meat production (red meat and poultry) this year will be down slightly, he said. "It is a little bit of a contrast this year if you look back through the last number of years, all the way to 1982; our total beef production has increased every year since." Every year, economists predict record meat supplies, but Sands said that has been the case since 1982. "The unusual factor," he said, "is if you don't see record supplies." He said 2003 isn't going to be up by very much over 2002. Sands said there is some risk that 2004 could be down a little. "From a competitive meat standpoint on the demand side," Sands said, "that could be a contributor as far as beef is concerned." Sands said 1976 saw record large per capita production. "It was around 95 pounds per capita on a retail weight basis," Sands said. "By the time we got into the latter part of the 1980s, after a huge liquidation, pounds per capita dropped down into the mid-70s." From 1979 to 1980 and on through 1986, per capita demand wasn't as much. "What happened during that timeframe," Sands said, "is that overall production levels were fairly stable, but consumers in 1985 and 1986, compared to 1988 and 1989, were telling us as an industry that for the big quantity of beef, we're going to pay you about 30 percent less." In 1979, consumers were paying about $4.25 per pound for beef. By 1986, consumers were paying $3 a pound based on inflation-adjusted prices. "That's just a flat definition of beef demand," Sands said. "It just doesn't come any clearer than that." That falling demand lasted through the 1980s and into the 1990s. The beef demand trend bottomed out in 1997 and 1998. Comparing those figures to 2002 figures indicates that consumption hasn't increased much, but price levels have. Sands suspects 2003 figures will be even higher. "It's another indication of strong demand," Sands said. The difference between 1998 and 2002 is close to $25 per cwt. "That's stronger demand," he reiterated. "If we look at the first four months of 2003, there wasn't any question that demand for beef has been absolutely stellar." Part of the higher prices can also be credited to a shortfall in supply, he noted. Similar figures are reflected in live cattle prices. The upward shift in demand from 1998 to 1999 translated into seven to eight dollars per cwt. in live cattle prices. This year has seen another $10 to $12 per cwt. added to the price of live cattle from 2000 and 2002 levels. "We think at least four dollars of that is stronger demand," Sands said. The rest of it is falling supplies. "That's why we're concerned about 2004 price levels being higher than this year," he said. "We're thinking that 2003 was distorted a little bit by a shortfall in supplies that we've seen over the last three months." That shortfall is primarily due to the closing of the U.S border to Canadian cattle and beef, following a report of bovine spongiform encephalopathy, or mad cow disease, in Canada. Sands thinks demand has been shallow, and it will continue to be so. He said he's concerned about building too high an expectation in 2004. With the national economy expected to grow stronger, there are predictions of higher demand, particularly for the more expensive cuts, but Sands doesn't think the overall market impacts beef demand the way most people think. In the overall economy, Sands said gross domestic product from the fourth quarter of 2002 to the first quarter of 2003 was up about four-tenths of a percent. "That's a growth rate on an annual basis of about 1.5 percent or 1.6 percent," Sands said. In the mid-1990s, the annual growth rate was four and five percent. "In the early 1990s, we were going through a recession," Sands said, "year over year declines in real product output." There was another recession in 2001. During the periods in which the economy was not doing well, however, prices indicated strong beef demand. "I don't see a very strong correlation between how the economy is doing, particularly if it is in a recession," Sands said, "and trying to link that to weaker beef demand." In 1990 and in 2001, when the economy was relatively weak, he noted, beef demand was good. "As the economy improved," he said, "demand has fallen." Sands said he thinks that when the economy is faltering and people are concerned about their jobs, they stop spending money on new cars, houses or furniture. They don't take big vacations, but they eat well. In that scenario, beef goes right to the top of the list. "I'm not sure I can prove it," he admits. If the economy improves and people start buying cars, houses and other expensive items, he speculates, then maybe discretionary income is squeezed and people don't buy the expensive cuts of meat. "I spent all my money on this stuff," Sands said by way of example. "Now, I've got to cut back on my food bill." That's why Sands said he worried about taking what happened in 2003 and extrapolating it to 2004. There is danger, he cautioned, in thinking that if the industry can sell cattle while the economy is in the doldrums, it can do even better with a stronger economy. "If we can sell cattle under these types of circumstances with a lousy economy at an average of $75, $76, $77," Sands said, "why can't we do it at $80 or $85 next year?" In the overall economy, consumer expenditures are pared back in hard times, but Sands questions where those cuts are made. "Interestingly enough," he said, "it does not appear to us that they've pared back expenditures on beef. In fact, it's just the opposite." Their total expenditures are down, he said, but not their expenditures on beef. Sands said he thinks the overall economy will grow by three percent next year with unemployment levels dropping below six percent. "It will take a while to work it down," he said, "but more people are going to be working. There are going to be more jobs." But Sands said he's still concerned about how that money gets allocated. "I do think that the profitability in the cow-calf business, aside from the drouth here last year, is going to recover pretty well this year," Sands said. "Calf and feeder cattle price levels certainly suggest that." He also said that the improvement in profitability indicates better pasture and range conditions. Still, he expects the cow inventory to be smaller than it was last year. It won't be a huge decline, he predicted, but he's expecting a modest decline. The last couple of years there has been a regional shift in beef cows as ranchers in drouth-ravaged states have sent their cattle (or sold them to be moved) to the Southern Plains states and to Tennessee, Kentucky and the southeastern U.S. Cow slaughter, he notes, went up last year. The question now is whether those people who took the cattle south and east are likely to continue to expand. "The big issue, I think, is if we can see any growth in heifer retention coming in the West," Sands said. "Then we've got to believe we're bottoming." Heifer retention for the last few years has been flat. If ranchers begin holding back replacement heifers, Sands said, the feeder cattle supply will tighten up quickly. "Cow slaughter this year could be up to 14 percent of the overall inventory," he said. Those are cull cows, however, Sands noted, most of them dairy cattle. "The dairy guys are making a big contribution to that," Sands said. "The dairy cow inventory the first part of the year was up 15 percent. That's kind of tapering off a little bit." In terms of beef cattle, there is a relatively old cow herd out there. "Not many heifers have been put back in," he pointed out. That means the beef industry has to hold back even more heifers to expand. Beef cow numbers, he said, are expected to be a little smaller. "We think there's going to be some additional shrinkage in dairy cow numbers," Sands said, "but Jan. 1, 2004, right now looks like the bottom. After that, we expect the numbers to grow — modestly at first, and then pick up a little bit." Sands spoke before last week’s cattle on feed report was issued, and he offered his own forecast of how they would read. "I suspect it's going show us maybe a small increase in July placements, I expect there were a little more marketings in July, and the on-feed number will be 95 or 94 percent of last year. "The overall on-feed numbers are pretty small, but it's not unusual to see a small on-feed number on Aug. 1, and then see the numbers grow dramatically as we go forward in the year," Sands said. "Part of the issue here," he said, "in terms of where you think this cattle market may be going over the next 90 days, is related to what you think happened to these cattle that were placed on feed in the April-May timeframe." Between March and June, placement numbers were above year earlier levels. "We placed 575,000 more cattle during this timeframe than we did a year earlier," Sands pointed out. "We've pulled cattle forward. Those big May cattle now have probably been on feed 90 days. How many of those cattle are dead? Probably not too many. Maybe not even all the April cattle are dead. The means there is a larger potential fed cattle supply over the next couple of months." About the same time, he noted, the Canadian border is expected to be opened, and larger beef supplies are going to be coming into the U.S. Retailers are making decisions right now on what they're going to merchandise in September and October. "The spread between beef and pork is huge," Sands said. "What we're hearing from retail clients is that cattle cutout at $141 is expensive compared to pork cutout of $60." For retailers, he said, it's an opportunity to do some shifting. Still, Sands predicted that 2003 will be more profitable than for the previous 18 months. Certainly, he said, feed costs will be lower, and that is driving the market right now. However, that, too, may be a cause for concern. "Other times when we've done that, in the early 1990s and again in 2000 and 2001, it hasn't translated into profit," Sands said. "Overall feeder cattle supplies are fairly tight from a historical perspective." From a trade standpoint, there are going to be fewer feeder cattle coming in from Canada this year than last year. "We're going to bring in a few more from Mexico," Sands said. "The trade side is probably going to wash. I don't think it will change dramatically one way or the other. What we don't bring in from Canada will probably be offset by more Mexican feeder cattle. Still, the overall feeder cattle supply is pretty tight." While Sands initially had predicted higher slaughter numbers in August, he's backed off, saying slaughter numbers will not be as high as he earlier thought. "Beef prices are going to come down, in all likelihood," Sands said. "Packer margins are going to be squeezed and they're going to be faced with continuing, in my estimation, to keep a pretty tight lid on these kills. But I still think we have a question out here about potential fed cattle supplies given those big April-May placements." The overall supplies to fuel higher kills are out there, he opined. Another thing that worries him is heavier weights. He sees weights increasing into the fall. "We've certainly cut weights pretty dramatically here in 2003," Sands said. "They are inching higher, but the industry is very current. They're well below last year." Actually, he said, they are running at least two percent lower than a year ago. The key, he said, is going to be September and October. He said he expects to see live cattle prices in the lower $70 range, but he doesn't expect it to reach $70 over the next few weeks. The question is whether it will rebound before the end of the year. Sands thinks a recovery in cattle prices will be delayed this year. It will be late next winter or early next spring before there's an uptick. "I'm a little bit concerned about the number of feeder cattle north of the border," Sands said. He sees good-sized numbers going on feed in the U.S. this fall. That could create some sizeable problems out in April and May. "I'm a little bit negative here on the front end," he said. "I'm not going to dispute that for the longer term perspective. We're not talking about being covered up with feed. We do have a pretty darned strong demand function. Not as strong as we'd like to believe here over the last few months, but nonetheless, pretty strong." The futures market is implying that the market may get in the $73 to $75 range, but Sands takes issue with that. "There has been a very flat price structure in the futures market," Sands said. "It seems, though, to me that the risk is on the front end of this market. We do think that October has got risk down into the lower $70s." He thinks February and April projections will be $76 to $77 with a chance of some upside movement into the low to mid $80 range. Sands is also concerned about feeder cattle prices. He expects the feeder market to go in the lower to mid-$90s. "That's setting up risk for us out in November," Sands said. Breakeven prices on live cattle could flatten up into the $77 to $78 range. He said that he can't help but be a little bit negative. "If the fed market comes down a little bit, it may take a little bit of an edge off the feeders," Sands said, "but that's a long way from being bearish on the feeder market." With cheap feed and tight feeder cattle supplies, ranching operations should be profitable. In fact, he said, calves may well be underpriced compared to seven and eight-weight feeder steers. Still, feeder prices could back off into the fall, but not to any great extent. "The availability of pasture and pasture conditions will play a big role," he said. "This fall will be no different than any other fall. "We're a little bit negative on the front end," Sands reiterated. "The market wouldn't be where it is today had the border not been closed." If they re-open the border in stages, it is going to impact supply. "But the overall demand structure still looks very good to me," Sands said. "While we may take the edge off of it a little bit as we go into next year, I don't think we're talking about going back to where we were two or three years ago, nor do I think we're going back to where we were in the 1990s." Sands thinks demand will remain strong. "My only caution is be very careful about simply extrapolating future price levels and saying, ‘Well, the cattle market this year is going to average $76 or $77,’" he said, "and we're going to have smaller supplies next year. Why does that not mean a higher price?" He said there are two reasons there won't be higher prices. First, he has some concern about whether the stronger demand is really there, and second, he said that in all likelihood there won't be another disruption over the Canadian border next year. |
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