Cattle-Fax Analysts Predict
1999 Will Be A Better Year

By Colleen Schreiber

CHARLOTTE, N.C. — Cattle producers attending the recent Cattle-Fax market outlook in conjunction with the National Cattlemen's Beef Association annual meeting here heard a fairly positive outlook for 1999.

Cattle-Fax analysts in general reported an improvement in price on all classes of cattle and predicted profitability — though certainly limited — in all segments of the cattle industry for 1999.

The fed cattle sector, they said, had a chance to make back $700 to $800 million of the $3 billion loss in equity it has experienced over the last 18 months. The analysts anticipate fed cattle prices to average about $66 cwt., up from the $62 average in 1998.

With grain prices anticipated to be in the low $2 range, they predicted feeder cattle prices will average between $74 and $75 for the year on 750-800 pound weights. Calf prices were expected to be in firm hands through the spring and in the high $80s to low $90s for five and half weight cattle, depending on the area of the country.

The analysts anticipated profitability returning to the cow-calf sector, not only from the calf standpoint but also from a cow value standpoint and from salvage cows.

Cattle-Fax executive vice president Topper Thorpe admitted right off the bat that their projections missed the mark last year.

"In retrospect, we were too optimistic and really erred in our projections for 1998," Thorpe told listeners. "There were several things that affected those projections including demand, a disruption in international trade and serious drouth in Texas, but the bottom line is that we just missed the market this last year as a result of a number of factors, and some of those factors are still with us."

For example, he said, the carryover — the number of fed cattle left over at the end of a given month that are carried into the next month — was high throughout 1998 and is still relatively high compared to the mid-1980s. That carryover, he said, really impacted the market.

He attributed the large carryover to the fact the feeding industry was losing money. There was not a good opportunity in the eyes of most cattle feeders to replace the cattle selling out of the feedyard with feeder cattle that would really work. In addition, Thorpe said, there was some optimism when feeders looked at the futures market because the board was premium or higher, which suggested that things were going to get better.

A consequence of that increased carryover was an increase in average carcass weights. The end result was about 856 million additional pounds of product, 16 million pounds per week, attributable to increased carcass weights.

"We faced a situation through the course of the year where in spite of the fact that we had smaller slaughter numbers, we still produced more beef. What happened was cattle got fed a little longer in anticipation of a better market.

"That increased beef production," the analyst said, "cost the industry $3-4 per cwt."

He reminded cattlemen that their industry, along with most all of agriculture, is now in a global market. That global market situation had an impact on beef cattle prices in terms of hides and offals.

"On a dollar for dollar basis, a dollar drop in hide and offal results in about a dollar drop per hundred in the price paid by the packer for a fed steer," Thorpe said. "That market was off a couple of bucks, which resulted in another couple of bucks lost. That, combined with the loss due to excess weight on the market, accounted for the difference in where we thought the market was going to be and where the market ended up being in 1998."

As in the past, meteorologist Dr. Art Douglas led off the forecast presentation with an overview of how weather patterns affected the 1998 market as well as what producers can expect for 1999 and the next couple of years.

This past year was a roller-coaster in terms of the weather, Douglas said, with El Niño conditions ruling in early 1998 and La Niña conditions in the last half of the year. La Niña conditions, he said, are entrenched throughout the world right now and will probably continue to dictate weather patterns for another year or two.

In terms of precipitation in early 1998, the West coast saw very wet conditions. Heavy precipitation dominated the Cornbelt, which helped the corn and soybean crops, but Texas and Florida experienced drouth through July. The Texas drouth, he noted, was really a northward extension of the Mexican drouth with 1998 being the driest year in Mexico in 50 years. Mexico, he noted, is still under severe drouth with many areas receiving only about five percent of their normal precipitation since September.

The last half of 1998 a slew of hurricanes hit Texas, breaking the drouth in large portions of East and northeastern Texas. At the same time there was a drying out period along the Eastern seaboard.

As for 1999, Douglas said cold water along the equator has really intensified, to the level coldest since 1985. Because of that, the meteorologist doesn't predict another El Niño to occur until about 2001 or possibly 2002.

He said he expects the Mexican drouth to extend at least through May, which will affect precipitation in the Southwest. Douglas predicted above-normal precipitation to continue in the Northwest and into the Midwest with typical spring weather through the Cornbelt, which should allow for normal planting conditions.

In the summer, however, Douglas predicts a reversal in the precipitation pattern in the Plains with a gradual moistening in the South and drying in the North.

Analyst Kevin Good followed up with comments on the liquidation phase of the cattle cycle. In January, total cattle numbers stood at 98.5 million head, five million head short of the last cycle high in 1996, Good said.

"We've liquidated for three straight years and we feel we will liquidate again in 1999."

Beef heifer replacements, Good noted, have declined close to a million head from the peak in 1995 to where they are projected today in 1999. Because of that, the number of heifers on feed has been historically high for the last three years.

"That's one of the main reasons why we’ve been able to keep the cattle on feed numbers at these levels and beef production at these levels, because we’ve dug deeper and deeper into the beef cattle/calf supply by using more heifers," Good explained.

He noted that the trend has changed somewhat since July. In January, heifer placements were 36.9 percent, which is down compared to year-ago levels but still about 2.5 percent higher than the five-year average.

Good said he doesn't anticipate 1999 will be an expansion year, but he said better calf prices should begin to help heal some wounds in that sector of the industry.

"And if that's the case, we'll likely see more interest in more heifers being replaced."

The other piece of the liquidation phase is cow slaughter. Cow slaughter, he noted, has declined from the peak in 1996.

"Our projections for 1999 indicate that cow slaughter numbers will drop about 200,000 to 250,000 head compared to last year, which is roughly about 5000 a week. And as we look over the next two years compared to the peak in 1996, we'll likely see a drop of about 1.5 million a year, which is about 30,000 a week."

Total cow numbers have declined about 2.5 million head from the peak in 1996, about a seven percent decline. Of that decline, about 1.8 million head were beef cows and the remainder dairy cows. This year's decline was only about one percent. The analyst said he expects to see the lowest levels since 1991 by 2000. And with the continued reduction over the next 12 to 18 months, there will be a smaller feeder and calf supply.

Imports of feeder cattle from Mexico and Canada trended a little higher from 1996 to 1998, and this coming year Cattle-Fax is expecting to get in another 100,000 to 200,000 head, mainly from Mexico.

"The main reason," Good said, "is because with tighter supplies domestically, we should have higher prices, which should draw more cattle across."

Steer and heifer slaughter in 1998, he said, was actually about 175,000 head smaller than in 1997. Steer slaughter peaked in 1995, and all the increase since then has actually come from the female side of the equation. Analysts are projecting a drop this year to about 600,000 head.

Based on those figures, the industry should see only about an 800,000 total head reduction in 1999, not much different from the total reduction the previous year.

Good reiterated the influence that weight is having on the market.

"This past year we saw record carcass weights of 725 pounds," he noted.

The trend line shows that average carcass weight has increased about 5.5 pounds per year over the last 25 years. That increase, Good told listeners, can be attributed to a number of things, including genetics, implant programs, and a faster turnover rate. Also, beef production per cow has increased about 175 pounds, he added.

Weights, he noted, should decline this year compared to last year but will likely remain above the trend line.

Average carcass weight, he predicted, will be right at 715 pounds, a 10 pound reduction compared to last year.

"How are we doing so far?" Good asked. "In January, carcass weights were still 20 to 25 pounds higher than a year ago. Hopefully, we will change that trend this year. With the profitability of the feedyards looking more hopeful this year, maybe people will be more willing to trade cattle and we will be able to get back on the right track in terms of weights."

Last year's total beef production matched the record of 25.7 billion pounds set back in the mid-1970s.

"Only this time we did it with 30 percent fewer cattle," Good stressed.

Overall, he anticipates beef production to be down about three percent to around 700 to 900 million pounds. That reduction will come from a one percent reduction in weight and about a two percent reduction in numbers compared to a year ago. Over the next couple of years, Good said, he expects beef production to decline an average of three percent.

In terms of the competition, the pork industry saw an increase in production of 10 percent in 1998 and analysts predict it will be up another one percent in 1999.

"If you look at where they are today as an industry, we feel they will continue to expand but at a much slower rate over the next couple of years. We don’t see the liquidation yet. The industry as a whole is much more integrated than it has been in the past," Good pointed out. "It’s starting to resemble the poultry industry, and because of that we feel like the pork industry will be a growth industry in the future from a tonnage standpoint."

The poultry industry, on the other hand, saw their smallest increase, only one percent, in a number of years. Their slowdown in growth, he said, was attributed to problems moving product to Russia, their largest export market, and there were some heat-related breeding problems. Good said they anticipate a three to four percent increase in 1999 for the broiler industry.

Overall meat supplies (beef, poultry and pork), Good told listeners, were up 2.5 percent in 1998 and Cattle-Fax analysts project them to be even to about a half percent up for 1999.

Analyst Duane Lenz focused on demand. He presented a graph which showed where the consumer spends his or her dollars at the meat counter.

In 1980, consumers spent about 54 cents of every dollar on beef, Lenz said. That share has declined over time, and last year it was down to about 40 cents.

"We don’t expect to reverse that trend anytime soon," Lenz said. "We expect that trend to be down again slightly next year."

Pork, on the other hand, has been fairly level. Last year the industry saw about a two percent increase in spending, "but there was a lot of pork on the market," Lenz added. "We're also seeing them put a lot more consumer-friendly products in the case, and next year we're projecting consumer spending to be even to up slightly on their percent of market share."

Lenz noted that what was given away by the beef industry is primarily being picked up by the poultry industry. In 1980, 16 cents of every dollar went to poultry. Today the figure is 26 cents.

"We think that’s something that will continue. We don’t see any reason for backing off that trend," Lenz told listeners. "They’re doing a good job in terms of product."

The ceiling for consumer expenditures on beef over time has been around $46 billion, Lenz noted. In 1981 the average consumer over the course of a year spent about $182 on beef. That trend has gone down every year since, but last year it was up slightly at $173. Lenz attributed the slight increase to excess tonnage. That figure, he predicted, will be back down in 1999 to around $167. In terms of pounds consumed annually by consumers, the trend has gone from a peak of around 80 pounds to around 62 to 63 pounds.

Spending last year, he noted, did go up a billion dollars, but again he attributed that to the amount of beef on the market. For 1999, analysts expect beef expenditures to come back down because there will be less beef and market prices will be slightly higher.

As for beef imports, Lenz said the industry has been importing the same amount of product since the 1970s. Imports, however, were up by about 12 percent in 1998 and experts expect them to be up another five percent, amounting to about 150 million pounds. The biggest exporter, he noted, is Canada, but Australia comes in at a close second.

Exports are one of the brightest spots for the beef industry.

"We've seen tremendous growth in this arena, to the tune of about $2.2 billion in growth over time," Lenz said. "We grew about four percent last year and we're projecting exports to grow about three to four percent this next year."

He noted that there have been some problems in terms of foreign currencies this past year. Japan, for example, is America's biggest customer. That country has gone through a currency devaluation over the last year or two, but Lenz said some strengthening has occurred.

"As that continues to improve, we are optimistic about

moving product into the Pacific Rim."

Switching to the grain market, Lenz said the industry is looking at about 10 to 11 billion bushels in supplies, just about the largest supply since 1987.

"That ensures that prices will stay relatively low as we go into early next year," Lenz remarked.

Carryover stocks are also starting to strengthen. In 1996, carryover stocks were almost at zero due to high corn prices. Thanks to the second largest crop in history last year, however, carryover stocks now stand at about 1.8 billion bushels, a factor critical to the overall industry.

Grain exports were down by quite a bit, Lenz noted. He expects that to strengthen some next year, but not enough to affect the forecast outlook.

"The bottom line right now is that it looks like planting retention will be about even, maybe down a little."

Using basis Omaha or Eastern Cornbelt, he predicts corn prices from now through the first half of this year to be from $1.90 to $2.10.

"Overall," he said, "we expect the average Omaha price will be $2.10 to $2.20. And when corn prices are cheap, that usually means that other grains will also be cheap."

Cattle-Fax director of market analysis, Randy Blach, presented the outlook for 1999.

"1998 was obviously not the kind of year we anticipated for the cow-calf sector," Blach told the crowd. "We expect that we're going to be in a more favorable situation in 1999."

Calf prices, he said, should be much more seasonal in 1999.

"Last year calf prices started out high and then there wasn’t much interest in them in the late summer and early fall, and in the last two to three months we've started to see some increased activity.

"A number of producers retained ownership of calf crops from last fall," he continued, "and we don’t see a lot of weakness in those cattle as we go into the spring grazing time. There’s lots of interest for that limited demand. So we feel calf prices will be in firm hands as we come through the spring. As get back into the fall period, depending on the area of the country, we're expecting them to be anywhere from the high $80s to low $90s basis five and a half weight cattle."

Blach said he anticipates that trend to continue to increase on through 2000-2001.

"We don’t expect calf prices to get as high as they were in the late 1980s and early 1990s when we had a lot of calves trading at $1-1.05. Primary thing that we go back to is that loss of market share, a loss of dollars coming into this industry, which is likely to limit us this time from getting back to previous cycle highs."

Salvage cow values and bred cow values should also begin to appreciate, he told listeners, which will help overall profitability.

In 1998, about half the cow-calf producers ended up with break-evens and the other half made a little money, Blach said. Cattle-Fax anticipates about 75 percent of the operations being profitable in 1999. By 2000 and 2001, he's hopeful that 70 to 80 percent of cow-calf operations will be in the black.

"We're still looking at that magical level being right around 80 cents for calves as breakeven for most operations," Blach noted. "On average, cow-calf operations ended up with about a $4 per head loss from 1980-1998, but in the top third compared to the bottom third there was about a $54 per head profit over that 20-year time period for the producers who did the best job managing costs, managing performance and managing production," Blach pointed out. "There is some opportunity," he insisted.

As for stocker and feeder cattle, Cattle-Fax analysts anticipate fed cattle prices to average $66 cwt. in 1999, up from a $62 average in 1998.

With grain prices in the low $2 range, experts expect feeder cattle prices to average between $74 and $75 for the year on a 750-800 pound steer.

"We expect feeder cattle prices to be in the low $70s to mid-$70s on average during the first half of the year, and then into the summer we expect to see some further appreciation of feeder cattle prices. We will likely see some cattle trading in the mid to upper $70s as we move into mid-summer and early fall.

"We don’t look for the margins to be quite as good on some of the summer operations," he added, "compared to what we will see on some of these winter operations."

Blach said they expect breakevens on the bulk of these feeder cattle coming off winter grazing operations in the mid to upper $60s, which should lead to a $40-$60 per head profit on most of those cattle.

Compared to 1998, he noted, summer operations should be more profitable.

"In 1998 we saw some of the worst losses we've seen on some of the summer grazing operations since the mid-1970s," Blach told listeners. "This year will likely be more profitable, but with the recent move in improved calf prices we're not going to make as much money on the cattle moving this summer and fall."

Despite a $3 billion loss in equity in the feeding industry, Blach told listeners that feeder cattle prices have stayed fairly high relative to the fed cattle market.

Why? He said in part it's because there's been a 10 to 15 percent increase in bunk capacity in the feeding industry over the last decade, and now with a 2.5 million head reduction in feeder calf and cattle supplies, there's more bunk capacity than the industry has supplies for.

He reiterated that on-feed numbers today are lower than they were a year ago, down about four percent, and anticipated that the industry will see a normal seasonal pattern of on-feed numbers in 1999. He cautioned producers about the above-average carryover, still 35 percent above the five year average on February 1.

"Yes, we’re in a better situation compared to year ago," Blach said. "The bulk of the breakevens were in the high $60s to low $70s then. Today the bulk of the breakevens are in the low $60s from $60-63. That’s a big change.

"We still have some big premiums in the futures market," he continued, "which has had a tendency to indicate to people that they're going to be okay down the road, and yet I’ll tell you we still have a lot of cattle on the front end. We have to make sure we keep these marketings aggressive and work through this front-end supply. We're hopeful that by May or June we will finally drop the carryover back below the previous five year average."

Finally, Blach told listeners he expected spring highs on fed cattle prices to be in the $66 to $68 range in late March and early April and likely back down in the $62-64 range in the summer. In the fall he expects prices to be in the mid to upper $60s.

"For the year in total, we think we'll be confined to $60-70 and we don’t really anticipate that we’ll spend much time in the top end of that range. The futures market is already at that mid to upper $60 range and is offering some pretty good profit opportunities to producers willing to reach out there and take advantage of that.

"The lower breakevens," he continued, "are the biggest

change that we see in the market compared to a year ago. We think the cattle that will likely make the most money in 1999 will be those marketed between now and May."

For the year in total, Cattle-Fax analysts anticipate fed cattle will make about $30-40 per head, which equates back to the $700 to $800 million in equity that they're expecting to make up.

Finally, he said their records indicate that the feeding and cow-calf industries have in the past simply been breakeven businesses.

"Over the last 20 years the breakevens have been about $68, and over the last 20 years we have lost about $1 to $1.50 per head on everything we fed. That assumes average production, average performance and no risk management. What’s the story? I think the point is that if we continue to do business the way we’ve done business, we’re going to keep getting what we got.

"There’s opportunities out here," he told listeners. "We're going to have to start taking advantage of some of the risk management opportunities to take some of these profits when they’re offered."