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The Cattle Business - Market Confusion

Livestock Update, May 2002

Bill R. McKinnon, Extension Animal Scientist, Marketing, VA Tech

Are you confused by the state of the cattle market? Well, at least you have plenty of company. Are there not fewer cows in the country? Is not the general economy improving and are not folks going back to work?

Certainly, the beef complex has been under severe pressure for the last several weeks from a number of sources. In fact, the last six to seven months have dealt a series of blows, some real, some psychological, to the beef industry. Below is a timeline of some of those important events.

Early September A case of BSE is reported in a Japanese cow. The Japanese consumer cuts back 20-30% on domestic beef and imported beef sales by 10-20%. Japan is the largest export customer of the U.S. beef industry. Eventually three cows are tested positive for BSE. Exports to Japan for the year had already been disappointing because of the strength of the dollar versus the yen.

September 11 -- The whole meat industry is thrown into confusion as vacation and business travel and dining dries up, worries about the economy and massive job layoffs grow.

October - January -- Feedlots suffer tremendous losses of over $100 per head as large numbers of high priced feeder cattle are ultimately marketed at heavy slaughter weights and lower than expected fed cattle prices. CattleFax has estimated that the cattle feeding sector has lost $1.14 billion in equity since October 1. Concerns have developed as to the availability of credit for cattle feeders.

November - April -- Beef cutout values lag behind year earlier levels by $5 to $13 per cwt. effectively putting a lid on fed cattle prices.

January - April -- Finished weights remain excessively heavy. During the February-April period fed carcass weights have averaged 29 pounds or 3.7% heavier than year earlier levels. That is like having another one and half extra steers on each load of fed cattle. The heavy slaughter weights have kept total beef production at relatively high levels and have taken bargaining power away from feeders when dealing with packer buyers.

March -- Russia and other former Soviet republics place a ban on the import of U.S. poultry allegedly over concerns of the use of antibiotics. The impact to the beef industry is the concern of lower priced beef alternatives.

March 13 -- Reports surface of eight cows in Kansas being held for testing for foot and mouth disease. The cattle futures markets break limit down. By the next week, Kansas veterinary officials report no FMD problem, just cows eating some really rough hay.

March 15 -- The March 1 Cattle on Feed Report indicates that feed yard placements of new cattle on feed were 16% above a year earlier. This report broke a trend of lower placements during recent months as the cattle feeding sector tried to stem the flow of red ink. Additionally, many of the new feedlot placements were heavier cattle (above 700 pounds); suggesting ample fed cattle supplies into the summer months.

March 28 -- Quarterly Hogs and Pigs Report suggests that in response to relatively cheap corn, the pork industry is planning modest expansion. The report suggests ample supplies of pork through most of the year. For only 10 months out of the last 100 have Choice steers averaged more than $30/cwt. above average plant delivered hog price.

April -- McDonalds announces that it will begin testing the use of imported beef suggesting that U.S. beef is too fat. The real issue may be cost, with U.S. cow slaughter down 6% for the year and imported beef running $.05-$.20/lb. less than U.S. products. Import quota caps on Australian and New Zealand beef will likely keep the situation static. Nevertheless, another psychological blow is dealt to the industry since McDonalds to this point has always used U.S. beef in its U.S. restaurants.

April -- Fueled by a number of issues among those listed above the live cattle futures market begins another $4-$6 meltdown following the $4 slide initiated back in March by the FMD scare and March Cattle on Feed Report. With live cattle contracts making new contract lows, feeder cattle contracts and cash feeder cattle followed the trend.

In our real world in Virginia, during April we have seen disappointing prices paid for heavier feeder cattle. Many sellers have complained about buyers forcing prices downward. Given buyer and banker cautiousness after being badly burned in 2001, current feeder cattle levels are at breakeven levels for those feeders wanting to hedge their cattle. For stocker cattle operators, in most cases the lid has been kept on light cattle prices avoiding a runaway outbreak of grass fever.

The lesson that Virginians should take away from the spring of 2002 is the need to examine the use of price risk protection. Operators backgrounding cattle purchased last fall had the opportunity to add another $6-$10/cwt. to their sale prices this spring by the use of hedging or options. Another $10 on 7 and 8 weight cattle would have helped to more than cover out of pocket costs. In an industry that seems to be increasingly more susceptible to issues out of their control, is simply makes sense to consider price risk management.

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