Beef Magazine is part of the Informa Markets Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Prices Set To Trend Lower

Increasing cattle numbers and more beef mean a trend to lower prices going into the last half of this decade.

More cows are staying home. Fewer heifers are being placed in the feedlots. Canada has the most beef cows in decades. Add them up and you have the formula for cow herd rebuilding throughout North America.

The net result is that long-term cattle prices (Figure 1) are predicted to trend lower as cattle and beef supplies increase as much as 3 billion lbs. over the rest of the decade, according to analysts working for Denver, CO-based Cattle-Fax.

“Industry participants are encouraged to implement a sound risk management program to help offset some of the potential price and equity risk that normally occur during this phase of the cattle cycle,” says Randy Blach, Cattle-Fax CEO. “The foundation is set. More cattle are in the pipeline.”

Total U.S. cattle numbers are on the rise with an expected cyclical peak in 2009 at about 100 million head from a low of 94.88 million head in 2004.

Beef cow numbers increased in 2005 to 33.25 million head on Jan. 1, 2006. They're expected to increase another 1.5 to 1.8 million head by '09. Even the 20-year decline in dairy cow numbers is expected to reverse, with numbers increasing slightly going into the latter half of the decade.

But, while the not-so-good news of larger supplies and lower prices looms for the U.S. cattle industry, Blach says overall prices have attained higher price plateaus.

“We've moved into higher trading ranges,” he explains. “Instead of seeing cyclical feeder-calf price lows in the $60/cwt. range, we'll see lows range from $90-$95.” (Figure 2)

All segments of the U.S. cattle business have benefited from demand growth from 1999-2005, Blach adds, with demand growth adding more than $200/head to the value of cattle.

He says export demand will be a wild card in the long-term cattle price future. He also cautions to watch corn prices.

“Feeder-calf prices could hold in the mid-$90s at the lows if exports are back to 2.5 billion lbs. — and corn prices remain in check,” Blach explains. “If exports fail to grow, prices will trend lower.”

For the short term, Cattle-Fax market analyst Kevin Good says the 550-lb. steer calf market is expected to average near $125/cwt. in 2006 (Figure 3).

“The steer calf market should follow a very seasonal pattern, with the highs in the spring and the lows in the fall,” Good says. “The correction into the fall is expected to be larger than has been seen in the last few years.” He adds that forward contracting should be evaluated as early as calving time this spring.

Feeder cattle in the 750-lb. range may average $3-$4/cwt. lower in 2006.

“Feeder cattle highs for the year will likely come early as the feeder market reacts to a lower year-to-year, fed-cattle market moving into the late spring and summer,” Good adds. “Feeder cattle basis levels in April and May could be highly erratic due to forced early movement of wheat cattle off winter grazing programs.”

Fed-cattle prices are expected to average near $85/cwt. in 2006 with prices trading in the low-mid $90s during the first quarter.

“The seasonal highs are expected to occur earlier than normal due to the supply distribution,” he says. “Prices risk back to the mid-upper $70s this summer and rebound into the mid-$80s this fall.”

Cattle-Fax analysts urge producers to watch the Choice/Select spread (Figure 4) as they weigh their marketing decisions over the next few years.

“When the spread is wide, packers are forced into the market — and producers have leverage,” Good explains. “When the spread narrows, packers have the leverage.”

The Choice/Select spread remained seasonal in 2005 at an annual average near $10/cwt., up slightly from 2004. The spread is expected to average $10/cwt. in 2006.

“This spread has been unseasonably wide so far in 2006, reflecting the tight available supply of market ready cattle, especially in the south,” Good says.

Blach emphasizes the importance of beef exports to the short- and long-term cattle price outlook — especially in the face of larger beef import levels.

“It's imperative that beef exports grow substantially during the next three years in order to keep supplies from becoming burdensome,” Blach says. “If the U.S. fails to recapture lost export market share during the remainder of this decade, prices could suffer as a result.”

Cattle-Fax long-term trends

  • The smallest fed cattle and beef production totals have passed for this cattle cycle.

  • Both fed and non-fed slaughter will increase.

  • Margins will shift: retail, food service and packer margins will improve as domestic slaughter and beef supplies increase.

  • Producer margins will narrow.

  • Cow-calf profit margins will be positive but prices will trend lower through the end of the decade.

  • Beef demand is expected to flatten out and not grow significantly in the years ahead.

  • The markets are expected to remain more volatile at all levels.

  • The cattle and beef business is experiencing significant structural change within all segments.

  • Fewer, larger and better-capitalized operations will continue to be the trend.

  • A coordinated production system is evolving and the feed yards will be the “collection” point.

  • Fewer cattle will trade in the cash market; more will trade on a beef-value basis.

  • Product branding will become the norm and more price differentiation will occur at all levels.

  • Food service market share as a percent of total beef sales will surpass retail in the next five years.

  • Animal ID and source verification are here. The U.S. will have to comply and adapt in this post-BSE environment in order to compete in the world markets.

TAGS: Prices