A couple of months back, Jim McAdams perhaps best summed up the current state of the U.S. beef industry. “We are currently in a defining time in the cattle business. Never have we had it so good, yet been so mad about it,” said the Adkins, TX, cattleman and president of the National Cattlemen's Beef Association (NCBA).
That characterization aptly describes the paradoxical times in which we live. On one hand, the U.S. beef industry is riding a wave of unprecedented prosperity, with prices for all classes of cattle, as well as beef demand, swelling beyond anything folks ever thought possible or sustainable. On the other hand, the industry is being torn by two widely divergent views of industry vision — one championing a value-based production and marketing system operating on free-market principles and robust foreign trade; the other espousing a traditional, commodity-based marketing system with a protectionist approach.
In the first quarter of 2005, the U.S. beef industry recorded its best first quarter of cattle prices ever. Despite beef supplies being up 2%, cattle prices grew 8%. In addition, marketing margins have narrowed, particularly the retail margin, enhancing farm-level cattle prices so far this year. What's more, beef demand has grown by 25% since 1989.
Still, like a Wagnerian opera, two competing forces are hurtling toward a showdown in the hearts and minds of producers, and in the courts and Congress — NCBA on one side, and the Livestock Marketing Association and R-CALF on the other.
There's plenty on the table
In the U.S. Supreme Court, the industry awaits a decision on the constitutionality of the national beef checkoff, which likely will come this month (see “Go Time For The Checkoff,” page 34). Meanwhile, a District Court Judge in Montana weighs arguments in late July on reopening of the U.S. border to Canadian live cattle.
In the 109th Congress, federal lawmakers are debating such issues as mandatory vs. voluntary country-of-origin labeling, as well as the seemingly perennial issue of who can — and who can't — own or control livestock prior to slaughter.
At the diplomatic level, the U.S. is struggling to recover the $4.8-billion in beef export markets it lost when BSE was discovered in a Washington state dairy cow in December 2003. Thus far, an estimated $1.9 billion of those lost markets have been recovered, but the big prize — the markets of the Pacific Rim — has proven more elusive.
Of the 112 countries that bought U.S. beef in 2003, 57 countries are currently open, reports NCBA. These markets represent 42% of the 2003 quantity, and 37% of the 2003 value.
Of the 112 countries, 23 have not purchased U.S. beef products but also don't have a stated ban. These markets represent 0.2% of the 2003 quantity and value. Of the 32 markets that remain closed, Japan and Korea represent $2.3 billion or 80% of the export business that still needs to be recovered, NCBA reports.
Japan moves closer
Japan moved a step closer to resuming beef trade with the U.S. in early May, when Japan's independent Food Safety Commission recommended the government drop its 3½-year-old requirement for 100% testing of all cattle at harvest for BSE. The proposal would exclude cattle younger than 21 months from testing.
As a result of the commission's proposal, Japan's Ministry of Agriculture, Forestry and Fisheries, and the Ministry of Health, Labor and Welfare, were to begin amending the blanket-testing ordinances, effective possibly in August, the Kyodo News reports. In addition, Japan still must deliberate the terms for removing the beef import ban.
Then, there's the specter of rising input costs on the farm and ranch. The cost of a gallon of regular unleaded fuel was $2.24 on May 2, a 42¢ jump from the same week in 2004. The price of diesel fuel hasn't increased as much but, with fuel being such a basic component in the cost of making and transporting virtually everything, costs of farm inputs have taken on a steeper incline, reflected in everything from equipment to commercial fertilizers.
In fact, 64% of cow-calf producer respondents to an exclusive survey of BEEF magazine readers, conducted in early May, indicated they anticipated their operating expenses to increase at least 5% in 2005. Of that 64%, 73% are expecting their input costs for fuel, machinery, etc., to increase by more than 10% in 2005. (See pie charts included with this story).
On a recent editorial trip into North Dakota, BEEF learned cow-calf producers in-tune with their cost-return situations estimated this year's rising input costs — ranging from fuel, fertilizer, seed and ag chemicals to vet supplies, machinery parts and outside services — will likely shave $20/head from their profits by the time they market calves this fall. For a 500-head outfit, that's a whopping $10,000.
Timing was fortunate
“It's a good thing these challenges have coincided with the peak of a cattle cycle,” says Harlan Hughes, North Dakota State University emeritus professor of economics.
And healthy it is. In fact, Chris Hurt, Purdue University Extension marketing specialist, says finished steer and calf prices set record first-quarter highs, as Nebraska-finished steers averaged $89 for the quarter — 8% higher than the same period in 2004. Meanwhile, average steer calf prices eclipsed $1.25/lb., while feeder steers cleared $1/lb. — both first-quarter records.
Hurt says the cattle-price strength is a result of both reduced supplies and strong demand. A 6% reduction in female harvest due to herd rebuilding was responsible for a 2% drop in first-quarter beef supplies.
“More females in the breeding herd mean U.S. beef supplies will grow in 2006 and later. But, for now, it means reduced domestic beef availability,” Hurt says.
He estimates the number of cattle coming from feedlots to rise 2% for the rest of 2005, with a decline in cow harvest as much as 7%. Thus, total slaughter will be only slightly higher, but heavier marketing weights will mean a 2% larger beef supply.
Hurt says these numbers assume a continued U.S. lockout of Canadian cattle 30 months of age and younger. If the border does open to live cattle, U.S. beef supplies would swell to 6%, he says.
Demand-wise, with 2% more beef in the first quarter, fed-cattle prices were up 8%, Hurt says, which indicates continued strength in beef demand at retail. And, a narrowing of marketing margins, particularly the retail margin, has enhanced farm-level cattle prices so far this year.
“This may be adding in the range of $4-$5/live cwt. and is helping to maintain farm prices above year-ago levels,” Hurt says. “The possibility of restoring beef exports to South Korea and Japan seems to be growing and may occur within a few months. Opening the Pacific Rim markets without opening the Canadian border to live animals could add an extra $3-$5/cwt. to already strong prices,” he says.
Hurt anticipates seasonal fed-cattle price declines in spring and summer. Current finished prices in the lower $90s are likely near yearly highs, he says, with early summer prices expected in the high $80s and late summer prices in the low $80s.
Look for prices to recover to the mid-to-high $80s in the fourth quarter, Hurt says, with calf prices retaining strength. Oklahoma City steer calves (500-550 lbs.) averaged a record $1.29/lb. in the first quarter.
“Some moderation in these prices is anticipated, with fall prices expected to be in the $1.10 to $1.20 range,” Hurt says.
“When we look back, I think some of the best years we'll see in the cattle business will have occurred in 2004 and 2005,” Hurt says. “And that could extend into 2006. The answer depends on what happens on the trade front in regard to Canada and Asia.”
For the cow-calf producer, Hurt characterizes the 2005 profit opportunities as “golden.” Given the sky-high feeder prices, cattle feeders need to take extra caution in protecting their downside risk, he adds.
“Overall, I see another year of very strong prices, probably record prices,” Hurt says.
Now, if internal industry harmony was just as rosy as the market prognosis, the industry would really have something to look forward to.