Cow-Calf Man Finally Regains
Driver’s Seat, Says Cattle-Fax

By Colleen Schreiber

DENVER – Cattle-Fax analysts had a bag of mixed news for Outlook Seminar participants at the National Cattlemen’s Beef Association winter convention here. They predicted bright news for some and less for others, but overall, they said, 1998 is expected to be the start of the upswing in the beef market cycle.

"There’s no question that the cow-calf man is in the driver’s seat," said Topper Thorpe, executive vice president of Cattle-Fax and CF Resources Inc.

"This coming year will be more difficult for those in the industry who depend on volume. We’re looking at tighter feeder supplies and excess feeding capacity, and the desire to keep feedlots full will likely limit profits in the feeding sector in 1998 and possibly through 1999."

Director of market analysis, Randy Blach, said cowmen can expect calf prices to average in the low $90s on a 500 pound steer calf, some $5-7 higher than last year.

Data, he noted, indicates that approximately 56 percent of cow-calf operators were profitable in 1997. At the predicted levels, Cattle-Fax expects more than 70 percent of all cow-calf producers to be profitable in 1998.

In terms of the fat cattle market, Blach said, "It would be an understatement to say that we’re disappointed. Markets have overreacted in the last week to 10 days and the market is cheaper than it really needs to be," he told listeners.

"The bottom line is that we have quite a few cattle out front."

In the short-term, he added, the carryover should get everyone’s attention.

"We’re looking at the biggest carryover ever coming out of January. It’s serious. We’re not going to get out of it in two weeks. It’s going to take aggressive marketing in the first quarter to chew through this number and get the front-end supply back to a more manageable situation," Blach said. "Don’t take it lightly. It’s not a short-term situation," he reiterated.

Cattle Fax analysts had anticipated that fed cattle prices in 1998 would average somewhere in the low $70s, Blach said, but factors like export activity slowdown and the large carryover have impacted that initial forecast for fed cattle prices by about $2 per hundredweight.

Factors which contribute to the lack of currentness in the market, Blach said, include a premium futures market, a poor swap on feeders, and cattle losing money.

"We’ve seen all three of these factors over the last six months."

Recent cattle on feed numbers indicate 512,000 head more than a year ago and more than a million head above the five year cycle. Blach told listeners that slaughter levels need to stay in the high 600,000s through the first part of 1998, at least for the first 60 days, to work through the oversupply.

"That sets the stage for the work we have to do here on the front end," he stressed. "Third quarter placements were big cattle. We came into this time period expecting that if we could do a good job marketing cattle in December and January, that February would be the transition time period. We just haven’t been able to get enough done.

"Now it looks like it will be April 1 before on-feed numbers drop back to year ago levels," he said. "If we have aggressive marketing, by the second quarter we should have front end numbers back down to manageable levels."

Second quarter fed prices depend on first quarter marketings, he reiterated. Spring fed cattle prices are expected to be $70-72 if the industry is current. If not, prices are expected to drop to the $66-68 range.

By May, analysts expect weekly slaughter levels to average 20,000 to 30,000 per week below year-earlier numbers.

Dr. Art Douglas, Director of Atmospheric Sciences at Creighton University, Omaha, Neb., has been developing long-range weather forecasts for Cattle-Fax for the last couple of years. He gave an overview of weather patterns as affected by El Niño.

At the last NCBA convention, Douglas forecast a 50 percent chance of an El Niño occurring in that year.

Around the world, he said, precipitation patterns of this El Niño indicate a lot more drouth than flooding, including severe drouth throughout Southeast Asia.

In terms of the U.S., Douglas said, the current El Niño has been rather tame. In terms of precipitation, he noted that this El Niño is expected to be a little stronger than normal in that it will go all the way up the coast of California.

Above-normal precipitation is expected through the South and up the coast of California, while the North will experience below-normal precipitation through August.

"The spring pattern will favor a dry northern Cornbelt and northern Rockies and a wet southern Plains and Southwest," he said.

Very warm temperatures are expected through spring 1998 throughout the Pacific Northwest, Douglas told listeners, while temperatures in the Ohio Valley, which had been warmer through the fall and winter months, are expected to gradually cool off. The southern Rockies and southern Plains, he noted, will remain cool due to high precipitation in the spring, while higher temperatures and a drier climate are expected along the Eastern Seaboard through the summer.

"Warm, dry weather toward the late summer is the best bet in the Cornbelt," he added.

Douglas told listeners that he’s predicting a more severe winter for 1998-99, more like the winters of 1994-97. Anti-El Niño years, he pointed out, tend to cause really cold, wet winters.

"There’s a lot of speculation in the press that if this El Niño ends suddenly, we could go into a very severe drouth like in 1983. If it ends slowly, then we’ll likely have favorable growing conditions, but it’s too early to make a call on when El Niño will end," he said.

Not surprisingly, analyst Kevin Good told listeners that weather will play a major role in what grain prices will be in the coming year.

He mentioned that total corn supplies at the beginning of the current marketing year topped 10 billion bushels for the first time in three years. Good noted, however, that projected increases in total corn use point to a year-to-year decline in carryover corn supplies.

"That tells me as we look at the world that there’s some risk in grain. Carryover supplies below one billion bushels leave little room for error with the 1998 crop. More likely, prices will be dramatically higher," he said.

Current fundamentals, Good added, suggest a normal seasonal price rally to a second quarter high near $2.70-2.75 a bushel basis Omaha. Price risk stems mostly from China’s potential to enter the market for U.S. corn and from weather uncertainties. El Niño years, he told listeners, have often been marked by abundant moisture during planting season.

In terms of trade, recent economic problems abroad, particularly because Asia’s buying power has been slashed, suggest the growth of U.S. beef exports could be threatened in 1998.

"Lost Asian business is potentially worth $3 cwt. on today’s fed cattle market," Good said. Mexico, however, is a bright spot in terms of exports.

Domestic demand for beef has been flat through 1990s, Good noted. As production levels decline, retail beef prices will increase, but lack of new spending will limit the extent of the price increase.

As of January 1, the nation’s cow herd stood at 42.9 million head, down from 44.6 million head at the cycle peak in 1996. Bret Fox told listeners that the current downsizing phase of the cattle cycle will be much shorter than the cycle in the 1980s.

Last year the industry saw peak numbers in cow liquidation, and Fox said further reductions in cow numbers are expected during 1998. Herd expansion is expected to begin again in 2000 or 2001. Unlike the liquidation in 1986, he added, downsizing this time has been more from the liquidation of heifers through feedlots than from cow culling.

"The southern Plains and Midwest accounted for all of the increase in cow slaughter during 1996. Texas alone accounted for nearly half of the almost million-head decline in beef cow inventories that year."

He also noted that feeder supplies have gradually declined since the peak in 1996. Successively smaller domestic calf crops, historically light stocker and feeder cattle imports from Mexico, and increased heifer retention will all contribute to even smaller supplies during the next two to three years.

Imports of feeder cattle and calves from Mexico and Canada have averaged well below 1990-95 levels.

"Higher prices in the U.S. should attract more imported cattle in the next couple of years," Fox said, "but that trend will be offset somewhat by herd rebuilding efforts in Mexico and tighter available supplies in Canada. More will stay home."

Steer and heifer slaughter peaked in 1997, and the industry is expected to see the biggest decline in steer and heifer slaughter during the second half of 1998 and 1999.

Beef production, which peaked in 1997, is expected to decline two to three percent in 1998 with further reductions projected for 1999 and 2000.

That decline in beef production will be offset by an increase in competing red meat production, however. Pork and poultry supplies are each expected to increase six percent from year-ago levels.

"Ample pork supplies are already evident in wider wholesale price spreads between beef and pork," Fox pointed out. "A historically narrow spread between the two in 1996 made beef a relatively more attractive item to meat buyers — an advantage which will be lost in 1998 as pork supplies increase."

Blach gave an overview of price levels experienced in the industry in 1997 as well as predictions for 1998 through 2000. Fed cattle profits in 1997 averaged $10 per head, he said. Major losses have occurred from December through February, and most breakevens range from the high $60s to low $70s on March through May fed cattle.

"These breakevens will limit profits through the first half of 1998," Blach told listeners. "Tighter feeder supplies and excess feeding capacity will underpin feeder cattle prices in 1998 and limit profits during the second half of the year."

Fed cattle prices are expected to average $68-70 for 1998. Prices near $62-64 during the first quarter will be the lows for the year, Blach added.

Based on $2 corn, feeder cattle prices the first half of 1998 are expected to range from $75-79 cwt. and into the low $80s by summer, assuming grain prices don’t change dramatically. Overall, he said, feeder cattle prices are expected to average about $3 higher during 1998 with a $6-8 premium to fed cattle.

Blach also noted that performance of stocker cattle on winter grazing has not been good this year, "but with wheat prices they way they are, we’re predicting that this year we’ll likely see more grazeout wheat. That means we’ll probably see more spread-out of placements through the spring."

All in all, Cattle-Fax analysts aren’t expecting profitability on stocker cattle to be as great as it was in 1997. Margins, Black noted, will be much more narrow than in 1997 because of higher purchase prices and poorer performance.

As for the cow-calf sector, Blach had good news. Overall, Cattle-Fax predicts calf prices will average nearly $25 cwt. over fed prices for the year.

"The cow-calf man is in the driver’s seat. We’ll see a little wider price premium on calves this year," he told listeners.

Calf prices are expected to stay strong through spring turnout. "Calf sellers can be patient pursuing fall contracts. Time should be on the producer’s side."

Bred cow prices, he noted, have and will continue to see substantial improvement. Since the low in 1996, prices have improved some $225 per head and are expected to increase another $75 to $100 per head during the next year, with further improvement through 2000.

Additionally, with declining cow slaughter levels combined with smaller fed beef production, cowmen should see a $6-8 cwt. increase in average salvage cow values. Average price for 1998 is expected to be between $42 and $45, Blach said.

In summation, Blach reiterated that an uptrend can be expected during the next couple of months once large front-end fed cattle supplies are marketed. That should be the beginning of a long-term uptrend into 2000, he said. He warned producers, however, not to expect prices to exceed previous cycle highs established in the early 1990s because of beef’s loss of market share.

Thorpe concluded the Cattle-Fax outlook report by pondering structural changes occurring in the beef industry that can and will have an impact on basic supply and demand.

"We’re not seeing a lot of consolidation in the cow-calf sector," Thorpe noted. "In contrast, 90 percent of our cattle are being marketed in some 2000 feedlots. We know we’re seeing some tremendous concentration in that sector. Smaller supplies of feeder cattle predicted for the next couple of years, I believe, will further spur that consolidation."

The packing sector, he reminded, has already undergone significant consolidation, and further consolidation is not likely. In fact, Thorpe said, he believes that the packing sector might slowly and gradually shift in the other direction.

"This concentration is primarily driven by economics,"
he said. "That will continue, and it will have an impact on each of the respective sectors."

The industry, Thorpe also pointed out, can expect to see more business relationships between different sectors.

"We have traditionally been a segmented industry that relates to each other in a predatory and antagonistic manner," Thorpe said. "We think this is going to change, must change, and some of it has already begun. We see evidence of these changes in the area of alliances and co-ops, and in the way we market our cattle. There has been discussion that focuses not so much on price discovery as cost discovery."