OSU Economist Offers Cautious
Optimism About Cattle Market

By David Bowser

STILLWATER, Okla. — This year should be better for U.S. cattlemen than last, says an Oklahoma livestock marketing specialist.

Dr. Derrell S. Peel of Oklahoma State University, however, is only cautiously optimistic, and a lot of that optimism depends on how the year develops.

"As we move into the later part of the year, I look for improved prices," he says.

He believes stronger fat cattle prices to work their way down the chain.

"That brings along feeder and calf prices as well," Peel points out.

For feedlot cattle, he thinks prices will probably see an annual average somewhere in the upper half of the $60 range.

It depends upon who and where you are as to whether you see a profit in 1999, Peel adds.

"Cow-calf producers are obviously looking for improvement in calf prices in an absolute sense," he says. "For stocker producers and feedlot producers, the real issue here is the margin. The margins right now are very good in terms of the alignment of feeder and calf prices to fed cattle prices, so there are some good profit opportunities right now for stockers and feeders."

He's more optimistic about the second half of the year. "It could be a better year for both fed cattle and feeder cattle," he says, "but I don't think it's going to be a banner year for either one of them."

The feeder cattle market will stay relatively strong, at least strong relative to the fed cattle market, because feeder supplies are tight.

"They're at more or less at breakeven now," Peel says. "I think that's generally where we're going to spend the year."

There is the danger, he warns, of getting too optimistic, especially in terms of feeder cattle prices.

"Feed prices are helping that right now," Peel notes. "Cheap gains allow feeder prices to be a little higher than they otherwise would be."

Generally, Peel says, the industry is doing about all it can do internally. The problems will be external.

"I think the big story in 1999 will be much as it was in 1998, and that is that the beef industry's fate probably hinges more than anything on factors external to the industry," he says.

It's a total meat production issue again. While he says most cattlemen can live with the numbers of cattle, the weights of those cattle remain a drag on the market. There still remains an excess of pork in the market, too.

"I'm not at all sure how this pork thing is going to play out," Peel cautions. Taken at face value, he says, the hog and pig report would suggest there will be a sharp reduction in pork production in the next five to six months.

"I'm a little concerned that we won't see it quite that fast or maybe not that dramatically," Peel warns.

Peel says despite the news coverage the federal hog bailout has gotten, he doesn't think it will have much effect in the marketplace. In an absolute sense it sounds like a lot of money, but divided among all the producers it won't be much, he says.

(Once the dust cleared, it turned out to be $5 per head for market pigs, with a $2500 maximum per producer. That's a lot of smoke for very little fire, and it's probably just a coincidence that Al Gore unveiled the "rescue" program in Iowa, the home of a lot of pigs and the first presidential caucus in 2000. — Ed.)

In reality, of course, there's a limited amount the government can do, Peel says.

"It's a nice gesture and a reflection that they do understand the problems and they are responding, but it's not going to have any effect," he says.

It may be a case of dealing with symptoms rather than problems.

"We are clearly oversupplied in the short run," he says. "Markets adjust to that, so by bailing people out, you actually aggravate that problem by keeping production at higher levels than they would otherwise adjust to."

He says a case could be made for the bailout causing worse problems in the future, but he doubts it will have much impact.

"I don't think it's a big enough deal to even do much on that account," he says. "I think whatever's going to happen is going to happen. Taken all together, they're probably having a slight marginal impact on hog markets or pork markets, but if you put everything together in terms of the international packages, domestic purchases, the financial packages, I don't think it will be a major factor."

The danger is that the hog market is in uncharted waters, he says, and no one knows for sure what that means for anybody.

"I think the key is simply that we have not taken the hog industry to this level probably ever, certainly not in recent history," he says. "Plus, the structure of the industry is changing rapidly. We don't really have any basis to know what to expect in terms of how this industry is going to respond to that."

Historical data would have limited value even if available, because it relates to an industry structure that no longer exists, for the most part.

"My concern is we're not seeing the kind of responses we're expecting right now," Peel says.

Even though the latest hog and pig report shows a decrease in the breeding herd, slaughter numbers are not broken down. There's not a lot of evidence that sows were slaughtered through the last quarter of 1998. Many of the reports of the decrease in pork dealt with baby pig problems, not sows.

"I don't think we've done a lot to change the size of that factory," Peel cautions.

Of more importance, he thinks, the poultry industry is attempting right now to come on much more strongly than it did in 1998. It may pick up the slack relative to pork and play the spoiler role in terms of meat production.

"I think we have to watch meat in terms of total meat production," Peel says.

"The other thing is how much of that do we have to eat here in the United States? The concerns are not only beef and pork, but more than anything they're on the poultry side."

Poultry reflects a bigger export market in terms of volume than beef or pork.

"It certainly declined in 1998," Peel says. "Our expectations are it will decline in 1999."

The bottom line from a beef industry perspective is that the supply fundamentals are improving.

"How much they improve or how fast they improve really hinges upon weights more than numbers," he says.

Most people in the beef industry feel comfortable with the cattle on feed numbers released this month, but the numbers aren't the issue. The issue is the weight.

"Certainly, if you want to buy in right now on some of the bigger projections on how much beef production falls in 1999, it really hinges critically on if and when these weights start coming down," Peel says. "So far they've shown no indication that they're coming down yet. It may not happen as fast as some people think. That's sort of the key to the supply fundamentals."

The other side of the equation is the total demand picture.

"I think we underestimated in 1998, especially in the last half of 1998, just how weak the whole demand complex was in the face of total meat supplies," he says.

Normally, demand does not change very fast in the short run, so when supply problems are solved, there is an almost immediate response.

"My guess is we'll see less than the usual response in 1999 because of the demand," he predicts.

Downward adjustments in markets are painful, Peel admits.

"Economists talk about prices," Peel says. "They go up and adjust downward, but the implications of downward adjusting prices means that somebody's going broke."

Peel says the world continues to offer plenty of challenges for cattle prices, but there doesn't seem to be a lot that cattlemen can do about them.

"I think internally, the beef industry is not in that bad a shape," Peel says. "Feeder supplies are tighter. If we can pull weights down, it will help, but we've done about all we can do internally. I'm afraid our fate is really in other hands."