Cattle-Fax Outlook Predicts
Tough Times Until Year 2001

By Colleen Schreiber

DENVER — It looked for a time as if 1997 would be the turnaround year for the cattle industry, but it wasn’t to be. Nor was this year. Now an industry analyst says the market cycle top won’t come next year either, nor the year after that.

Several unpredictable circumstances, like the Asian crisis, high corn prices and an extreme drouth across the Southwest, have produced record losses in the feeding sector for well over a year now. The loss of equity has been so great that a good many feeders have fallen out and will likely never return.

That was the picture drawn by Cattle-Fax vice president Topper Thorpe at the recent 44th annual Beef Cattle Short Course and Trade Show here. Thorpe did his best to be upbeat and open his talk on a positive note, but the rest of his remarks made that task difficult.

"There’s a lot of exciting things going on in the marketplace today," Thorpe told the 1100-plus listeners, "but we tend to get caught up in the current market situation and we’re not able to look down the road. Today we’re not only faced with economic challenges, but we’re also faced with drastic structural changes. These structural changes involve the way we approach the marketplace, the way we price cattle, the way we market cattle, who owns the cattle before they come to the packing plant, etc."

In general, he said, supply and demand, drive prices. Another factor that has an even more significant influence on the market in the short run is psychology.

"Feeders have been losing money since last November or December; that has continued through today. We’re talking about significant losses. In the short run, the psychological impact has the largest impact and tends to rule. In the long run, statistics win."

Thorpe noted that beef production varies inversely with annual average fed cattle prices. This simple relationship reflects a supply-driven market for beef and live cattle. Correctly anticipating the trend in production generally allows for an accurate forecast of the trend in live cattle prices.

"We missed this market this year," he admitted. "We missed it to some degree because of some of the factors that are influencing the current situation. Beginning in late 1997, calf prices increased anywhere from $25 to $40 a hundredweight. It appeared that we were headed in the right direction and would have fewer problems down the road."

By the end of 1997 and the beginning of 1998, however, the beef industry was staring at three large factors which have an adverse impact on the marketplace. The three factors, the recipe for "uncurrentness," Thorpe told listeners, were a premium futures market, a poor swap on feeders, and fed cattle losing money.

"Historically, when these three factors combine, it has meant bad news for the cattle market, and 1998 has not been an exception," he said.

Cattle feeding economics have continually encouraged feeders to hold cattle and not market aggressively.

"When feeders are losing money and they’re looking at buying feeder cattle to replace the fat cattle they lost money on, but they find feeder cattle with breakevens that are significantly higher than the cattle they’re selling today ... that makes for a difficult situation. Then when the futures market has a premium, the feeder believes it’s better to go ahead and feed the cattle longer and put a little more weight on them, gambling that the market will be a little better."

On January 1, the size of the nation’s cow herd stood at 42.9 million head, down from 44.6 million head at the cycle peak in 1996.

Compared to 1997, carcass weights have increased dramatically, which has resulted in increased beef tonnage. Carcass weights in 1998, Thorpe noted, have persistently averaged 30 pounds above normal.

"Each one-pound increase in weight is equivalent to slaughtering an additional 1000 head of cattle per week," he calculated. "Record heavy weights alone have cost the feeding industry between three and four dollars a hundredweight on all fed steers and heifers sold from January through July, and weights are expected to stay at record-large levels through the third quarter."

The other significant factor that has played havoc on U.S. beef prices is a significant reduction in hide and offal value, a result primarily of the Asian crisis.

"There’s basically a one-to-one relationship between the value of hide and offal and the price the packer is willing to pay for your cattle," Thorpe explained. "For every dollar decline in hide and offal, we see a decline in cattle prices. Over time it’s brought about a two to three dollar per hundred decline. So we’re shy somewhere from $25 to $30 a head on fed cattle as a result of hide and offal."

The $4-5 loss due to increased tonnage and the additional $2-3 loss from hide and offal value, he continued, "accounts for a good part of the difference between where we are and where we thought we would be today."

And if producers don’t have enough to deal with already with the current market situation, add drouth to it.

"We already have increased tonnage, and now we’re seeing an increase in cow slaughter as a direct result of the drouth, and based on what our meteorologist tells us, we don’t expect it to end in the near future. We could possibly see a situation very similar to the 1950s," Thorpe told the crowd.

The one bright spot is that the industry in the current cattle cycle is at the point where cow numbers are at the lowest level.

"Once the other factors have worked out, then we’re set to improve," Thorpe remarked. "The size of our factory becomes really critical. Think about cow numbers as your factory. We peaked in 1996 and we’re going to see significant reductions in the cow herd over the next several years. If the drouth continues, we could see even further significant reductions than predicted."

Another sign that the industry is not doing anything to increase the size of the factory at the current time is the fact that heifer placements in feedlots are at their highest levels ever.

Despite the fact that steer and heifer slaughter is expected to be somewhere between two and three percent below where it was last year, Thorpe said beef production will likely end up a little higher than a year ago because of increased average slaughter weights and some additional cow slaughter.

"A combination of those two things are in large part what is influencing our market today and what will continue to influence over the weeks and months to come," he said.

He also noted that the industry exported more product this year compared to the last, but one of the big differences is that the industry is not exporting higher priced cuts, as in years past.

Increased red meat production from all sectors, but particularly record level pork production, is also having a negative impact on beef prices. One of the biggest challenges facing the beef industry, Thorpe pointed out, is that domestic spending for beef continues to decline at record levels. In 1980, 55 cents of each dollar was spent on beef. It dropped to 44 cents in 1997.

"If we’re producing more product and there’s the same amount of dollars out there to sell it and we have to sell it or smell it, then the end result will be that we’ll have to lower the price to sell it," Thorpe told listeners. "There’s a real concern that beef’s market share will continue to decline, and there’s the possibility that demand could decline as fast if not faster than our supplies."

One bright spot for feeders, but not so bright for grain farmers, is that with a significantly larger corn crop this year compared to 1997, economists are predicting corn prices to be under $2 a bushel, which in turn will have a significant impact on feeder prices.

With the Freedom to Farm bill, Thorpe said he expects average grain prices to increase over the next several years.

Despite help from lower grain prices, stocker operators and feeders alike will continue to have a difficult time seeing any profit in the short term.

"Stocker operators who have calves coming off in the next 60 to 90 days are looking to retain ownership because of the current prices," Thorpe said. "It does not appear that these cattle are going to make any money, however, because we have a lot of heavier cattle coming off, not to mention significant increases in pork production. It looks like it will be awfully tough for cattle feeders to realize any profits in the near future," he reiterated.

Thorpe told listeners that he doesn’t expect to see prices near cycle high until 2001. The drouth in particular, he added, has set it back somewhat from original predictions.

He briefly discussed the antagonistic and predatory relationships that exist today between the various entities of the beef industry. Thorpe said he believes the industry will continue to see consolidation and integration, "not vertical integration like we see in the poultry industry," but rather business relationships, alliances, cooperatives, etc., that are already evident today.

"It’s important that we have them," he said. "I believe we’ll continue to see more grid-type marketing, because more and more producers are tired of selling their better cattle at average prices."