February 2004
BSE brought much uncertainty to the 2004 cattle outlook,
but current inventory numbers suggest even smaller domestic
beef production. The size of the nation’s beef cattle
herd continues to decline even in the face of record high
prices in 2003 clearly showing that producers’ initial
reaction to price highs was to sell breeding stock and heifers
rather than retain them for herd growth. As of January 1,
the total number of cattle and calves had dropped to 94.9
million head one percent below last year, and the lowest
number in the herd since1959.
Beef cow numbers dropped by about one-half of a percent
to the lowest numbers since 1991. The continuing drought
in the west central plains appears to be one of the important
reasons why the national beef cow numbers continue to drop.
Beef cow numbers were down in Colorado 13 percent, and down
four percent in each Nebraska, Oklahoma, and North Dakota.
Further east, Missouri’s herd was about unchanged,
Illinois was up one percent, and Iowa and Indiana were each
down about one percent. Producers are expected to be hesitant
to increase herds in 2004 with the uncertainty of implications
surrounding BSE. Producers indicate they are holding back
two percent fewer heifers which will mean continued smaller
beef cow numbers in the July mid-year update.
Low milk prices and strong cull cow prices also encouraged
dairies to reduce the number of milk cows by two percent
in 2003. At 9 million head of milk cows that is the lowest
since 1868 (yes, three years after the Civil War). Continued
reductions in the size of the milk herd is anticipated this
year as the number of heifers being retained to go back
into the herd is down two percent.
How will BSE impact trade in 2004? No one knows the answer
with a high degree of confidence so a set of assumptions
need to be made. For this analysis, it is assumed that domestic
demand is not affected by BSE and that U.S. exports are
lost for the first-half of 2004 but restored in the last-half.
In addition, it is assumed that imports are reduced in the
first-half by 15 percent and restored in the last-half of
2004. The net affect of these trade impacts is that an additional
8.5 percent of our domestic production will need to be consumed
in the U.S. in the first-half of the year. It is important
to realize that differences in these flows can have dramatic
impacts on cattle prices which could easily be $5 to $10
different. Thus, volatility and rapidly changing prices
could be an expected characteristic of 2004 cattle prices.
With the loss of 8.5 percent of net trade in the first-half
of the year. Domestic beef supplies are expected to be up
by five percent in the first-quarter and by three percent
in the second quarter. Assuming trade is resumed in the
last-half of the year, domestic supplies will drop by about
four percent.
Prices of Nebraska choice steers averaged a record $84.69
per hundredweight in 2003 capped by an average of $99 in
the last quarter. Given the assumptions for trade above,
Finished steer prices are expected to average in the very
high $70s or low $80s for the first quarter, drop to an
average in the mid-$70s in the second quarter recover a
couple of dollars in the third quarter and be in the low
$80s in the final quarter. While finished cattle prices
will be sharply lower than last-year’s record, these
price estimates would provide a yearly average price in
the higher $70s, and would be the second, or third, highest
annual price on record (1990 was $78.56 and 2003 was $84.69).
Feeder cattle and calf prices will be lower than last year
as the double hit of lower fed cattle prices and higher
feed costs cut into bids. In 2003, steer calves at Oklahoma
City weighing 500 to 550 pounds averaged $103 per hundredweight.
This year, the same calves are expected to average in the
mid-$90s. Heifer calves at the same location in the 450
to 500 pound range averaged $95 per hundred last year and
are expected to be near $90 for an average this year with
prices in the low $90 early in the year and dropping to
the high $80s in the summer and fall. Feeder steers at 750
to 800 pounds at Oklahoma City averaged $90 in 2003 and
are expected to average in the low to mid $80s this year.
The best news is that BSE (so far) has not had the devastating
impacts some feared. Loss of exports and higher feed prices
are offsetting still smaller cattle production in 2004 and
likely moving cattle prices lower. However, brood cow operations
should still be able to cover all costs of production, and
finished cattle prices could be surprisingly strong. Obviously,
some cattle feeders that were unhedged on December 23rd
may have suffered large financial losses.
Cattle prices could be extremely volatile in 2004 (both
with higher and lower price movements) and feed prices could
also have wide swings. This is an environment in which producers
need to consider price risk management including the potential
use of futures or options for hedging corn, soybean meal,
feeder cattle, and finished cattle prices.
Chris Hurt
Purdue University
February 2, 2004
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