6 June 2007

5 minute read

Year-to-date to Memorial Day fed cattle prices averaged 9% higher than the year earlier in spite of 1% higher beef production. Higher cattle prices on larger supplies is a indication of stronger demand for cattle. Based on national press coverage of retail beef prices, consumers are beginning to see the higher beef prices as well.

Beef production was up 1%, on 2.4% higher cattle slaughter and 1.4% lower carcass weights. Carcass weights have been lower than 2006 levels since the third week of the year and are expected to remain below year earlier for the remainder of the year. Three factors contributed to this carcass weight decline. First, weights in 2006 were at times record high. Second, the rough winter weather stressed cattle leading to poorer performance and lower weights. Third, higher corn prices will discourage overfeeding of cattle. One factor that has contributed to lower average weights early in 2007, but could change later in the year is the mix of steers, heifers, and cows going to slaughter. Cow slaughter has been higher than 2006 levels, but may decline. With fewer cows in the mix the average will increase.

Cow slaughter through mid-May was up 15% with a similar increase in both dairy and beef cows. While steer slaughter to date is identical to the year before, heifer slaughter increased a modest 0.7%. In 2006, cow slaughter did not begin to increase until April and by mid-year it had increased significantly as ranges and pastures deteriorated. In general, range and pasture conditions are starting this season much better than last year. At the third week of May, 76% of US beef cows were in states with pastures rated as good to excellent compared to 56% in 2006. Likewise, last year 23% of cows were on poor or very poor pastures compared to less than 10% this year. Given the improved range conditions and rebound in feeder cattle prices from last fall ranchers are expected to resume their expansion plans leading to reduced cow and heifer slaughter later in the year.

Five Market 65-80% Choice steer prices averaged $93.51 through the first 21 weeks of 2007, $7.60/cwt liveweight higher than the same period in 2006 and on pace for another record high average price for the year. Dressed prices averaged $150.21. Five consecutive months of lower feedlot placements has reduced the supply of market ready cattle. Blizzards in the Plains this winter has helped to reduce carcass weights and put feedlots into a much stronger bargaining position moving into the summer months. The lower marketings and lighter weights will support fed cattle prices. Choice steer prices are forecast to average in the low $90s in the third quarter and mid $90s in October to March with stronger prices forecast for second quarter 2008.

In spite of near record selling prices, feedlots lost money on cattle sold in January and February. Profits returned with March sales and should continue profitable at least into the fall as the purchase price paid for feeder cattle declined for cattle sold during this period. Feeder cattle prices have rebounded since last fall as fed cattle prices increased and corn prices decreased. Prices for feeder cattle will be sensitive to corn prices, but yearlings are forecast to remain above $1/pound for the remainder of the year. Calf prices are expected to be near the first quarter average for most of the year. However, the fourth quarter calf run is expected to trade in the $110-115 range, near the fourth quarter prices on 2006.

There are a few wild cards that could alter the price forecast. First, consumer demand has been good thus far in 2007, but the higher retail beef prices at a time of higher gas prices could cause consumers to look for a cheaper substitute. Second, is trade issues, both export opportunities expanding in Japan and South Korea and potentially increased imports from Canada depending on when and how an agreement is reached on over 30 month old cattle. Japan is slowly expanding purchases of US beef that is age verified and there are indications that some packers are paying a $25/head premium on cattle that are eligible for the Japanese market. South Korea continues to be a challenge for beef exports, but packers are beginning to get product into this market. Third, is corn prices tied to weather. Clearly, feeder cattle prices will be sensitive to corn prices, but fed cattle prices could be impacted if feedlots either market at heavier weights on cheaper corn or accelerate marketings on higher priced corn. Barring negative news from these variables, 2007 is looking to be a profitable year for feedlots and cowherds.

Seasonal Price Patterns…

While price levels for cattle have increased from recent years, seasonal price patterns appear to still hold true in most years. The same can be said for hog prices. Early summer is a time of the year when cattle and hogs prices move in opposite directions in most years.

Hog prices move higher on smaller seasonal supplies due to reduced slaughter relating to conception the previous summer and lower carcass weights due to rising temperatures this summer. Cattle prices move lower in early summer on larger supplies due to increased slaughter from the previous year’s calf crop and steadily rising carcass weights from May to November.

While biology and weather are significant drivers of seasonal patterns, we watch each year for things that could disrupt these two forces of nature. This year it appears that both hog and cattle prices are following a somewhat normal seasonal pattern. Hog prices moved higher in May and are expected to level off for the summer with a peak in prices occurring some time between late May and mid August. Over the last 10 years hog prices increased an average of 12% from March to May. In 2007, prices increased 20% during this period and the summer peak may not be in yet.

Fed cattle prices typically have a peak in March or April and this year prices were over $1/pound live weight in April. In most years, prices decline into June and put in a summer low in July or August. Over the last 10 years this spring high to summer low decline has averaged approximately 6-7% for monthly prices. The high to low weekly price range will be wider. Iowa April prices averaged $98.50. A 7% decline would put the July or August average price between $91-92. The basis adjusted August futures is predicting early August prices between $88-89.