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By David Bowser AMARILLO — Standing before Texas Cattle Feeders Association members at their annual convention here last weekend, Randy Blach, executive vice president of Cattle Fax, grinned broadly. "It has been an interesting time in the marketplace," Blach said. "There are a lot of things going on." Scott Keeling, the outgoing president of the association, noted that at least year's convention many of the members weren't sure if they were going to be in business this year. With fed cattle prices reaching an all-time high of $110 this month, however, Blach isn't the only one grinning. The Denver-based economist said there are three key drivers to the new highs in the marketplace. "If we go back and look over the last several years, we've had some tremendous demand growth," Blach said. That demand trend started in 1999 and continued up to 9/11. "Then demand was derailed," he said. "It was derailed about nine months." It then started growing again. "Demand has been a key part of what we're experiencing in this market today," Blach said. The closure of the Canadian border is also a key part of the equation, he added. That accelerated marketings and led to overkill in the U.S. beef industry. "That was key," Blach said. The overall market structure has also changed. "We've gone from having a weak basis, a premium futures market that we dealt with for most of the late 1990s and early 2001 and 2002," Blach said. These three areas have all been positive over the last year. "Those are the three key factors as I look at our market today," Blach said. The demand curve changed in 1999, he continued. For 20 years demand for beef was dropping, but in 1999 it began to turn around. That has translated into higher prices. "We're going to average about $15 a hundredweight higher this year than we did a year ago," Blach said. He attributed about six to seven dollars of that to the closure of the Canadian border. "It's not all been the Canadian border closure," he pointed out. "We've had record beef demand that peaked the first two months of this year." The reason, he contended, is the money the industry has spent over the past 15 years on advertising, research, new product development, and promotion. "All of those things, we're getting paid for today," Blach said. Consumers are spending $14 billion more a year for beef today than they were in the 1990s. While figures indicate that consumer spending in 2003 will be even with 2002, Blach estimated that net beef supplies will be a billion pounds less this year than last. "Exports are up," Blach said. "Imports are down." Consequently, he said, the money is being spread over a billion fewer pounds than a year ago. Blach thinks the industry is in a new trading range. "I believe we've built a foundation that we can trade at a higher range on our wholesale beef products than what we've experienced over the last 20 years," Blach said. While he doesn't think the market will sustain a cutout value of two dollars, he does think $1.30 will be a new foundation. "We can sit in here with a cutout that trades from $1.50 to $1.80 over a longer period of time and get along just fine," Blach said. There is concern among some that beef will be priced out of the retail market, but Blach pointed to changes in retail prices from 1998 to the new century. "Retail prices have gone up significantly the last several years," he said. "I would contend that retailers have had enough of $70 to $80 markets built-in over the last three or four years. I don't believe that with a higher price level we'll have to see retail prices go up 30 or 40 percent." He conceded, however, that another 10 or 15 percent rise in retail prices is likely. "If we're able to sit in here and trade cattle, we believe that next year fed cattle will average year-around $82 to $84," Blach said. "It's not going to take a 30 percent increase in retail prices to do that." He admits there are some challenges in the food service sector. This is particularly dicey with the higher-end cuts. "But we have to remember we've seen a pretty good increase in chicken breast prices over the last two years as well," Blach noted. "They've gone up substantially, and we're not as likely to see much substitution there." Blach said the pork industry is struggling. They have not enjoyed the demand growth that beef has had. Over the last 30 years, Blach said fed cattle prices and retail beef prices have had a tendency to move up, then flatten out. "We just continue to do that as we look at it over time," Blach said. "I would suspect, even though we're going to be in a marketplace that has a tremendous amount of volatility for some time, that we will find a trading range where we'll flatten out and establish the upper end of that parameter and also the lower end." The big push the last several weeks, Blach said, was because there were not many Choice cattle available. "If we look at it seasonally, we are at the smallest percent Choice cattle normally in the first half of October," Blach reminded. Packers have over-killed trying to keep up with demand as supplies lagged. Everybody has been profitable, Blach said. It doesn't look like things will change in the immediate future, he predicted, noting that kill rates are still high. Last week 648,000 head of cattle were slaughtered, he said, though many expected 580,000 to 590,000 head. Kills aren't going to drop as long as the industry is experiencing the prices it is now, he opined. The continued overkill is a positive situation for cattlemen. "The market has everybody nervous, and I expect it will continue to take more cattle on a weekly basis than what most people think over the next several months," Blach said. The Choice-Select spread is the widest it's ever been, but again Blach doesn't think that spread can be sustained. "For the year, we're going to average a Choice-Select spread of between $12 and $13," Blach said. "That will be the widest Choice-Select spread in history." He thinks it will stay that wide over the next several months, but it won't stay at the $30 to $35 level that it reached earlier this month. The price differential between Select ribeye and Certified Angus Beef ribeyes is incredible. "We've never seen anything like that," Blach said. While many things came together to create today's market, he said the discovery of BSE, or mad cow disease, in Canada and the resulting border closing to Canadian cattle touched off the market rally. "Canada was the catalyst for a lot of the things we're experiencing in our market today," Blach said. The BSE discovery was devastating to Canadian cattlemen. "The border closed on May 20," Blach recounted. "The week prior to that, fed cattle in Canada were bringing a buck-eighty." It dropped all the way to 30 cents in Canadian money. "That's about a $20 market on a U.S. basis," Blach said. "We were sitting here trading at $80. They were at $20." In the last several weeks, Canadians have seen some improvement in their market. Earlier this month, their average prices were about $79 in Canadian dollars. "That's about a high $50s market on the U.S. basis," Blach said. At the same time, U.S. fed cattle were selling at between 95 cents and a dollar. Not many U.S. producers could survive the beating Canadian producers have taken, he said. "It's pretty sobering," Blach said. "Wherever we have seen BSE in any part of the world, we've seen similar market reaction. There have been devastating market changes that have gone along with discovery of BSE in these other foreign lands." U.S. cattlemen profited from the border being closed. It accelerated marketing levels and led to a faster kill rate in late May, June and July. "We've got a carryover that's never been this small," Blach said. "We've never had a front end supply as small as it is today." That's been the situation for the last three months, and fed cattle supplies are at their tightest levels in history. "At least since the late 1970s," Blach said. From an import standpoint, he added, the story is not just Canada. "Imports are going to be down this year," Blach said, estimating a decline of 400 or 500 million pounds. "Canada is obviously part of that," he said, but Australian imports also are down about 15 percent because of drouth in the island nation. Because of the problems in Canada and Australia, U.S. exports should increase in market share. "This is going to be the biggest year we’ve seen for exports," Blach predicted. It has been one of those rare times when everything happened just right. "All the stars lined up," Blach said. There was a drop imports, an increase in exports, and a production decline in the U.S. "We've ended up with a net beef supply, the production we've had in the U.S. plus or minus the trade, with a drop of a billion pounds," Blach said. "We'll have 26.8 billion pounds net beef supply this year." Last year, it was 27.8 billion pounds. "That's been a major, major driving factor in the market that we're experiencing," Blach said. He believes net beef supplies should decline another 300 million pounds next year. "We don't think we're going to have imports drop any further," he added. Blach expects to see the border open with Canada, and he expects Australia to increase its production. New Zealand is already up 11 or 12 percent in exports to the U.S., Blach said, and will continue to try to increase their exports to the U.S. "But our U.S. production will likely drop next year," he continued, "which will keep our beef supplies small over the next couple of years." |
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