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Expansion Has Begun

The cattle cycle just completed the longest liquidation phase in the modern era of beef production. As U.S. herd expansion unfolds, total cattle numbers are expected to increase by more than 5 million head by 2009. At the 2005 Cattle Industry Annual Convention and Trade Show in San Antonio, TX, last month, Randy Blach, Cattle-Fax executive vice president, and his crew of market analysts gave cattlemen

The cattle cycle just completed the longest liquidation phase in the modern era of beef production. As U.S. herd expansion unfolds, total cattle numbers are expected to increase by more than 5 million head by 2009.

At the 2005 Cattle Industry Annual Convention and Trade Show in San Antonio, TX, last month, Randy Blach, Cattle-Fax executive vice president, and his crew of market analysts gave cattlemen a glance at the Denver-based market research and forecasting group's crystal ball.

Following is a synopsis of the Cattle-Fax 2005 Outlook.

Herd expansion underway

U.S. cattle numbers totaled 95.8 million head on Jan. 1, 2005 — up 1% compared to a year earlier. The increase in cows stems in part from a 15% decline in cow slaughter — split between beef cows and dairy cows — to 424,000 head in 2004. Evidence of herd expansion is also seen in a drop in heifer numbers as total feedlot placements — down from averages of about 35% from 1998-2003 to 31.8% in 2004. As herd expansion continues over the next several years, heifers are expected to be 30-32% of total feedlot placements.

Beef cow numbers totaled 33.1 million head on Jan. 1, 2005 — up 195,000 during 2004. Beef cow numbers are expected to increase 1.5 million-1.8 million head by 2009. This increase began showing up late last fall when feeder cattle and calf inventories outside feedlots totaled 27.94 head — up 2% from a year earlier.

Meat production to increase

Domestic beef production is expected to increase by 1 billion lbs. during 2005 — mostly due to larger steer and heifer slaughter. From 2005 to 2009 steer and heifer slaughter is expected to increase by about 1 million head through cow herd expansion and growing feeder cattle supplies. This will lead to an increased beef production of more than 2 billion lbs. — reaching record large production by 2008-2009.

Net beef supplies are projected to be 400 million-500 million lbs. larger in 2005, as any increases in exports aren't likely to offset increased beef production and increasing beef import totals.

Increases in pork and poultry production will combine with beef to provide record large per-capita net meat supplies. Pork production will keep pace with increased export demand, which jumped 23% in 2004.

Avian disease outbreaks in the U.S. reduced the poultry industry's export demand about 10% last year. The poultry industry saw a 6% decline in exports to Russia in 2005, which fractionally accounts for about one-third of U.S. broiler exports. Meanwhile, poultry production grew about 3% last year — a level likely to be matched in 2005.

Cattle-Fax analysts are adamant that regaining access to key export markets will be critical to moderating the expected increases in net beef supplies during the next several years.

Demand and trade factors

It's no secret beef demand has improved consistently since the early 1990s. Last year, U.S. consumer expenditures for beef took the largest jump in two decades, from $62 billion to $70 billion. From 1990-2004 American consumer expenditures for beef increased $70/person.

Expectations are for per-capita consumption and demand to level out over the next several years, and for retail prices to remain relatively flat. This year, expect to see Choice cutout values remain strong with an average of nearly $140/cwt., but down slightly from 2003-2004 levels. Cattle-Fax expects wholesale beef prices to drift lower over the next several years, which will chip away at beef demand calculations.

With most large international beef markets closed to U.S. exports, those markets fell by 85% in 2004. Beef tonnage imported was up 20%.

Mexico was the only major importer to reopen its borders to U.S. processors. Beef exports to Mexico in 2004 reached 350 million lbs. — far short of 2003's 600 million lbs. Optimism was buoyed late in the year when U.S. beef exports to Mexico began resembling pre-2003 levels.

If trade agreements are reached with Japan and South Korea in the first half of 2005, Cattle-Fax expects U.S. processors to export 350 million lbs. and 200 million lbs., respectively, to those countries. Current expectations are for total U.S. beef exports to reach 1 billion lbs. in 2005, assuming Japan and South Korea are back on line for much of the year.

Last year signaled a dramatic change in the beef balance of trade for the U.S. Beef imports increased significantly in 2004 due to higher U.S. beef prices and smaller available supplies.

At nearly 1.1 billion lbs., beef imports from Canada reached record levels in 2004. Canadian imports are expected to increase again in 2005, possibly hitting the 1.2-billion-lb. mark. Australian beef imports to the U.S. dropped 2% last year as the Aussies tried to fill the void left by the U.S in the Pacific Rim. A slight increase in imports to the U.S. is expected this year as Australian beef is displaced in the Pacific Rim by a resumption of U.S. trade.

The wild card in 2004 was Uruguay. Imports from this small South American country surged from 60 million lbs. in 2003 to 375 million lbs. While Uruguay has a country-specific quota of just 20,000 metric tons (MT), more than 100,000 MT of Uruguayan beef has entered the U.S. out-of-quota and subject to a 26.4% tariff. Most Uruguayan product was in the form of lean trimmings — competing against New Zealand and Australian imports.

Short/long-term price outlook

Cattle-Fax analysts say fed cattle prices have moved to a new and higher trading range. In fact, they say the last 24 months have been the most profitable of the past 30 years, and a lot of equity has been built into the cattle feeding business.

Short term, fed cattle prices are expected to average $82-$84/cwt. in 2005 — from the low $90s at the highs, to the mid-$70s at the late-summer lows. Prices are expected to rebound into the mid-$80s late in the year.

Longer term, expect the low-$70s to provide good support for fed prices — and the mid-$90s to offer strong resistance.

But, Cattle-Fax warns the markets are more volatile than any time in history. Some key assumptions for 2005 include:

  • U.S. 750-lb. steer prices will average $100-$102/cwt. Average steer calf prices will be near $120/cwt.

  • Cattle feeding margins will be thin.

  • Feeder cattle and calf supplies are up 460,000 head — 2% larger than a year ago.

  • If the Canadian border reopens in the spring, 300,000-400,000 head of Canadian feeder cattle will be imported in 2005, along with 1.3 million head from Mexico.

Cow-calf producers can expect calf prices to hold in a new and higher trading range of $105/cwt. at the lows, to about $130/cwt. at the highs, for the next few years. These prices assume reopened beef export markets and feed grain prices don't increase significantly. Cow-calf producers should have the opportunity for several years of profit.

Expect the 550-lb. calf market to average about $120 for 2005. The market should follow a very seasonal pattern with highs in the spring and lows in the fall during the peak in runs.

Bred female prices are trading at historically high levels and are expected to continue to do so until more heifers are retained and begin to saturate the market. This may take several years, Cattle-Fax says. Expect annual average bred cow prices to peak at $1,050/head in 2005 and decline to $900 by 2008.

“Cow-calf producers are encouraged to optimize costs and maximize production at this stage of the cattle cycle,” Blach says. “Producers are encouraged to evaluate where they fit in this rapidly changing and volatile industry and begin to prepare for more change in the future.”

Major trends

  • Domestic demand — Expect flattening in beef demand due to increased slaughter, increased supplies and decreased exports.

  • Globalization — Expect increased competition. Countries to watch are Brazil, Australia, Canada and China.

  • Structural changes — Expect more retail and food service consolidation, product branding, differentiation and accountability. Pay attention to market access, animal ID and source verification.