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HUNTIN' DAYLIGHT -- GIVE AND TAKE MARKETS

by: Wes Ishmael

If the numbers turn up as many in the industry anticipated in mid-January, the nation's cowherd is continuing its cyclical expansion. Just ahead of USDA's release of the January 1 cattle inventory, expectations were for numbers to be up about one percent compared to a year earlier.

Moreover, analysts at the Livestock Marketing Information Center (LMIC) explained, “The number of heifers held as beef cow replacements is expected to be well above a year ago and could easily be the largest since 2007.”

One significant caveat to continued and accelerated herd expansion revolves around the deepening drought in wide swaths of cow country. In Texas and Oklahoma for instance, the dearth of winter wheat pasture pushed an extraordinary number of calves into the feedlot, either for backgrounding, or straight to the finish pens. While wholesale culling has yet to begin, many producers there have begun scaling back by shipping older cows to town.

Whether expansion continues or stalls due to drought, beef supplies promise to remain tight in the short run, especially for Choice beef.

In mid-January, according to LMIC, the Choice-Select spread eclipsed $15 before settling back a touch. At the time, carcass prices were six percent above the year before. The shortage of Choice had been compounded by the resumption of trade with Japan, which demands highly marbled beef. At least that was true for the month that the Japanese market was in play.

Supply relative to demand in the near term means that cash prices shouldn't suffer much with Japanese exports still in limbo. In fact, cash cattle trade for fed cattle was steamy the week of the announcement that Japan was renewing its ban of U.S. beef, which is a whole ‘nother story.

It's the long-term that gets a whole lot cloudier. Domestic production will grow. The longer the U.S. is kept out of markets such as Japan, the more opportunity competitors have to strengthen their foothold.

In the meantime, beef production and cattle slaughter were running two to three percent lower through mid-January as more heifers were retained and more cows in need of replacement were held over. For perspective, cow slaughter was about six percent less last year than in 2004. Heifer slaughter exhibited the same year-to-year decrease and had inched up to seven percent by the end of the last quarter.

Consequently, the Economic Research Service (ERS) reports that any significant increase in beef production prior to 2007—when calves from these additionally retained females begin exiting the feedlot—will only come from heavier slaughter weights, feeder cattle imports from Mexico and Canada, or fed cattle imports from Canada. And, all of these, say ERS analysts, are contingent upon adequate crop and pasture conditions for the remainder of 2006.

Expanding From the Outside

So far, Canadian feeder cattle imports have been much lower than many anticipated, though they still appear to be in search of a new normality. In July, when the border was reopened to cattle 30 months old and younger, about 15,000 head came in, most of them feeder cattle. By August about 6,700 feeders per week were coming across, compared to about 8,800 head per week during the same period in 2002—the last full live cattle trading year with Canada before BSE—according to James Mintert, an agricultural economist at Kansas State University.     

During the first couple of weeks of the new year, approximately 6,500 per week were coming across. Last summer, Darrell Mark, an agricultural economist at the University of Nebraska explained that August through December are historically the heaviest import months for Canadian feeder cattle. From 2000 to 2002, he says feeder imports for those months averaged 4,800 per week. And that included 2002 when more than twice as many feeder and fed cattle were exported to the U.S. than at anytime in history; there was a major drought in Canada at the time.

However, the recent tariff levied on corn flowing into Canada from the U.S. (about $1.65/bushel) could increase Canadian cattle exports to the U.S. says ERS.

All of this was the case before Canada's most recent BSE discovery. While the border remains open, there are obviously some who opposed resumption of live cattle trade with Canada from the beginning, who are already clamoring for the border to be closed again.

Even without increased beef production, there is plenty of competition from other protein sources. Some would say U.S. consumers are drowning in meat and poultry.

According to ERS, increases in broiler slaughter and in the average live weight of broilers at slaughter increased estimated broiler production 100 million lb. during the last quarter of 2005, to 8.85 billion lb. Broiler exports have lost ground, chicken warehoused in storage has grown and domestic prices are falling. For this year, ERS estimates 36.3 billion lb. of broiler production.

Now, throw in pork—about 21.8 billion lb. estimated for this year—and beef at about 25.9 billion lb. Total red meat and poultry production is predicted to be record high at approximately 89.9 billion lbs.

Prices High and Volatile

For all of that, though, prices remain historically high. In fact, fed cattle prices out-performed many expectations heading into the new year. By the middle of January, feeder prices, though past their peak and losing some ground to deteriorating pasture conditions, were averaging seven percent above a year earlier as were fed cattle prices, according to ERS. Likewise, although wholesale beef prices had softened through mid-January, they were still 15 percent higher than the same week in 2005, says LMIC.

That's true despite the fact that still robust domestic beef demand has lost some steam.

The other thing that remains true is the gargantuan price volatility and canyon-wide price spreads between calves and fed cattle, and between feeders and fed cattle.

Consider just one example. From 1994 to 2004, on average, fed cattle prices declined about 6.0 percent between March and July when those prices are usually softest. On average prices then increased about 6.6 percent from July to November. Last year, fed prices lost 13.3 percent and gained back 12.5 percent during the same respective time frames, according to LMIC. At their lowest, fed steers last year brought $80.33; at their highest, $93.33.

Ironically, one thing adding to what has become commonplace increased price volatility is Mandatory Livestock Price Reporting (MLPR). The law is currently in limbo since it expired last Fall and has yet to be authorized. However, since MLPR was legislated in 1999 and enacted in 2001, price volatility more than doubled. That's one conclusion drawn by the Economic Research Service in a study evaluating the impact of MLPR. Even when they accounted for volatility spawned by the market shocks of BSE and the like, price volatility was still higher.

For what it's worth, one explanation proffered is that under voluntary reporting, market reporters could toss out the extreme lows or extreme highs that weren't representative of the trade overall. With MLPR, those extremes stay in.

“In 2006 many factors could overwhelm the normal seasonal price pattern for slaughter steers. At the top of the list is international trade,” say LMIC researchers. “For example, robust exports to reopened Asian markets this summer could mitigate the normal seasonal price decline. At this time, LMIC forecasts suggest that the seasonal increase in fed cattle prices into this spring could be less than normal given the unusually strong market posted in January. Beyond that, rather normal seasonal price patterns could occur, including a normal summer low posted in mid-summer.”

Likewise, there are plenty of variables that could slow herd expansion or narrow this phase of the cycle. One thing is bankable, though, unless history rewrites itself, calf prices—while still historically high—will begin trending down as the product of herd expansion enters the market in the next year or so. Just like it always has.

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