The year 2007 will be logged as a year of high cattle prices marinated in uncertainty. And 2008 looks to be much the same.
If you measure success by the kind of song you whistle when it comes time to market your calves, 2007 was most likely a happy tune. Success in '08 may have you whistling a similar melody, albeit with a sour note or two along the way.
With beef demand still strong, packers fighting for market share, and the chance for higher exports, analysts project strong cattle prices to continue in all sectors in 2008. But producers and feeders can't expect a peaceful drive to market without some juggling to offset volatile cattle and grain markets.
"Margins will remain tight (for fed cattle) even with higher cattle prices, so managing risk will be important at these price levels," says Randy Blach, Cattle-Fax executive vice president.
Projections by Blach and other analysts peg fed-cattle prices averaging in the low- to mid-$90s/cwt. range -- similar to '07 -- with peaks and valleys throughout the year.
Blach sees fed-cattle prices in the $92-$94 range in '08, virtually the same as 2007's $92-$93. "There's still a lot of volatility, so we could see $1 cattle ($100/cwt.) this spring, but in the mid-$80s in large supply periods."
John Anderson, Mississippi State University (MSU) Extension livestock marketing specialist in Starkville, sees a $6-$7 range in fed-cattle prices every quarter of '08. He projects first-quarter prices in the $92-$99 range, $91-$97 the second quarter, $88-$96 the third quarter and $91-$98 the fourth.
That's similar to projections by Dave Anderson, Texas A&M University (TAMU) Extension livestock marketing economist in College Station, but he expects fed cattle to trade in a tighter range throughout the year. "I believe first-quarter fed markets will be $97-$99," he says, compared with $95-$99 the second quarter, $88-$99 the third and $94-$99 the final quarter.
Chris Hurt, Purdue University Extension economist in West Lafayette, IN, projects first-quarter prices of $92-$98, with the second quarter $1 higher. For the entire year, he expects cattle prices to make record highs, averaging $1 or so above 2007's $92 average.
Jim Gill, Texas Cattle Feeders Association market director, is more bullish about first-quarter fed prices. "I see $96-$102 in the first quarter," he says, "because tight numbers seen in November and December will remain tight the first of the year."
He forecasts $92-$98 the second quarter, $88-$92 the third, and $94-$98 in 2008's last quarter.
Feeder and calf prices -- Blach points out that, despite high fed-cattle prices, cattle feeders have averaged only a small return. "There's been only a $5/head feeding profit on average during the last decade," he says, adding that cow-calf and stocker operators continue to earn better profits due to tight supplies.
MSU's John Anderson sees 700- to 800-lb. feeder-cattle prices in the first quarter at $105-$110/cwt., $107-$112 in the second quarter, $107-$114 in the third, and $105-$112 in the fourth.
No. 1 steers (700-800 lbs.) in Texas will likely bring an average of $103-$106/cwt. in the first quarter, says TAMU's Dave Anderson, with $103-$107 likely in the second quarter. He expects third-quarter prices in the $104-$108 range, with the fourth quarter at $100-$105.
Meanwhile, prices for 500- to 600-lb. calves will likely average $110-$114/cwt. the first quarter, $114-$119 the second, $113-$116 the third, and $105-$111 the fourth.
Gill sees similar prices for feeder cattle, noting that drought in the Southeast could pressure prices because producers won't have pasture for their calves and can't rebuild herds.
Corn outlook -- The reasons behind the projected prices for all production phases are many, but high corn prices are at the top. Higher corn will continue, Blach says, though ethanol's expansion may not be as explosive in '08 due to tightening margins for the fuel. That could temper corn prices.
John Anderson sees a good possibility of a break in corn prices in early '08. "Corn supplies appear to be more than adequate to meet current demand from ethanol production. Of course, ethanol demand can change rather quickly.
"Crude-oil prices sustained at levels over $90/barrel (they had surpassed $97 in early November) could provide a significant boost for ethanol production and would likely allow ethanol producers to keep paying up for corn," he says.
Another factor supporting corn prices in latter 2007 was the weaker U.S. dollar. "If the dollar strengthens from its current near-historic lows, this could dampen what has been very strong export demand for corn (and all grains, in fact)," he says.
Gill doesn't see much relief in high corn prices. Though demand might be tempered, "ethanol's bubble hasn't burst," he says.
Dave Anderson expects corn to trade a bit higher than 2007 on an annual average basis. "Given the price relationship to soybeans, I'm expecting fewer corn acres," he says.
That creates a lot of risk for cattle producers, he adds. "We may find that corn prices are higher in March to get a last-minute push to increase acres. Weather will become even more important if we plant fewer acres."
John Anderson notes 2007 corn prices were more manageable than some expected a year ago. "This helped to encourage growth in pork and broiler production, with large supplies of both showing up at the end of '07. The bottom line is the grain market remains a key source of uncertainty in the cattle market for '08," he says.
Lack of herd expansion -- The lack of herd expansion will continue to support prices for all industry segments in '08. Fewer calves mean tighter feeder supplies, and feedyards likely will be willing to bid up prices for them.
"Drought in the Southeast, an area holding 25% of the nation's cow herd, is one reason why expansion isn't taking place," Blach says. Despite Texas and other areas having pulled out of droughts two years ago, herd buildup doesn't happen overnight, he adds.
He sees beef-cow numbers down slightly in early '08, but projects beef production to be up 0.5% -- thanks to a 12-lb. increase in slaughter weights (784 lbs./carcass). Carcass weights for '07 were off 3-4 lbs., but could have been much lower after the hard winter in much of the feeding area early in the year.
Hurt says herd expansion could begin in late '08. "Higher prices will eventually encourage cow-herd expansion," he says, but not until at least mid 2008 or even 2009.
Exports up! -- Phil Seng, U.S. Meat Export Federation president and CEO, projects U.S. beef exports to reach pre-BSE 2003 levels in '09 or '10. "A lot of it depends on how (export customers) open and when they open up to full bone-in and 30 months and beyond, or World Organization for Animal Health consistency," he says.
Seng expects Japan and South Korea to be heavy in the U.S. beef market once more, joining Mexico, the top foreign buyer of U.S. beef at 400,000 mt in purchases, at some point after 2010. Exports to Canada also are up, he says, and are expected to top 120,000 mt in '07 "and gradually increase over the years."
Blach says exports could top 1.8 billion lbs. in '08, "and it could be more with the value of the U.S. dollar and new opportunities in Asia and other countries."
Packers are paying -- The fact packers are willing to pay stout prices for feds has certainly been a plus and an indication consumer demand is there. Blach says the carcass cutout value has reached a much higher plateau in recent years.
From '78 to '02, Choice cutout values were $102-$115/cwt., but have averaged $145-$150 the last five years and were $151 in '07. "The growth in demand we saw in '99 and beyond has helped that happen," he says.
Gill says packers were willing to pay the higher prices despite slimmer margins seen in late '07. "If they hadn't bid this much the last few months, we could have seen prices $6-$10/cwt. cheaper," he says.
Blach points out that "branded" products have added about $19/head to cattle prices, an extra $500 million-$600 million for producers and feeders since '02.
"We'll see this trend increase in '08 and beyond," he says.