As beef cow producers approach the weaning of their 2003 calves, market prices are at or near record levels. Two key questions are why are calf prices so high this fall and will they last?
The primary explanation for the high prices lies in current beef demand and current beef supply. It's the first time in 25 years that both these economic factors are positive.
Increased Beef Demand
After 25 years of decreasing demand, beef demand reversed direction in 1998. That demand is exceptionally strong in the last half of 2003 for three primary reasons:
Product development. Around 1,600 new beef products have been developed in just the past four years. In today's competitive marketing environment, new products and new ways to prepare them must be developed and promoted or our competition will capture the market.
The popularity of the Atkins high-protein diet is also contributing to the current renewed beef demand.
A temporary ban on Canadian beef exports due to bovine spongiform encephalopathy has bestowed on the U.S. the export markets lost by the Canadians.
Decreased Beef Supply
Beef supply is also very supportive to current beef prices. Three phenomena are primarily responsible:
Feeder calf production is down. Year 2003 is the eighth consecutive year of decreasing feeder calf production and the longest consecutive run of decreasing beef cow numbers on record.
The last few years of declining beef cow numbers can be attributed to the extended U.S. drought. The only signal beef cow producers are even considering rebuilding herds is the current drop in the number of heifers being placed on feed.
Some North Dakota producers tell me they need one more good price year to pay down some bills before they'll consider holding back added heifers. But I believe the record calf prices will trigger more retention of weaned 2003 heifer calves. The diversion of heifers from feeding to breeding over the 2004-2005 time period should boost feeder prices even more during these years.
The simple fact is some feedlots won't have feeder cattle, a dangerous situation because as feedlot utilization goes down, a feedlot's cost of gain for its remaining cattle on feed goes up. U.S. feedlots need the U.S. border open to Canadian feeder cattle exports in order to maintain feedlot utilization rates at acceptable levels.
In these times of fewer and fewer feeder cattle, the current excess feedlot capacity is driving feeder cattle prices ever higher.
Carcass weights have fallen 30-35 lbs. from last year due to feedlots being extremely current. In fact, feedlots are so current that the Choice/Select price spread (as of late September) was a record $27/cwt. Today's U.S. markets need Choice cattle, and sellers of Choice cattle are cleaning up in today's slaughter cattle market.
Reducing carcass weight is the quickest way to reduce beef supply. A drop from an 835-lb. average carcass weight (ACW) to an 800-lb. ACW represents a 4.19% drop in beef supply. If the U.S. harvests 600,000 head/week, a 35-lb. drop in ACW is equal to a 26,500 fewer head harvested/week.
The ban on Canadian feeder-cattle exports to the U.S. is also impacting beef prices. Last year, Canada exported about 520,000 feeder cattle to the U.S., a time when the U.S. also imported about 800,000 head of feeder cattle from Mexico.
The U.S. feedlot sector needs these 1.3 million head of Canadian and Mexican feeder cattle, along with the calves produced by the 171,000 less U.S. beef cows in 2003. As feedlots begin facing a drop in their utilization rates, we can expect U.S. feedlots to bid aggressively for the remaining supply of 2003 feeder calves.
In order to ensure that utilization, some feedlots will take ownership of calves at weaning to guarantee they have replacement feeders when pen space opens up. Many of these feedlots will contract with backgrounding lots to grow their newly purchased weaned calves.
Look for U.S. feedlots to purchase Canadian weaned calves and then contract with Canadian backgrounders to grow them into feeders. When the border opens, these feeders will be moved into U.S. feedlots. In the mean time, other feedlots will aggressively bid for U.S.-born feeder cattle.
Will The Prices Last?
Figure 1 presents my current long-run planning prices for the U.S. Northern Plains. The red line presents fall planning prices for steer calves, the blue line represents annual feeder steer prices, and the green line presents annual Nebraska direct slaughter steer prices.
Fall 2003 calf prices are projected to hit record levels and generate a double top for the current beef price cycle. While a double top typically signals a downturn in cattle price, my analysis suggests calf prices will remain strong through 2004 to 2005.
This suggests that beef cow producers should have three more years of favorable beef calf prices. This isn't necessarily true, however, for backgrounders and cattle feeders who will face decreased feeder cattle supply and higher feeder prices.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].