More volatility seen for cattle market in 2007

This past year was one of many ups and downs for cattle producers, and 2007 could be just as volatile.

In 2006, Georgia cattlemen saw prices for 500 to 600-pound steers fall nearly $30 per 100 pounds specified weight (cwt.), from mid-February to early December, says Curt Lacy, University of Georgia Extension livestock economist.

“Prices for the most part followed their seasonal tendencies up through mid-September,” says Lacy. “However, as the USDA began compiling supply and usage estimates for the 2006-07 corn crop, it became apparent that in spite of the second largest crop in U.S. history, higher corn prices were necessary to ration usage. As a result, prices for calves dropped by more than $20 per cwt., in less than three months at the end of 2006.”

Overall, cattle and beef production is expected to increase only slightly in 2007, says Lacy. For the year, commercial beef production is expected to be about 26.3 billion pounds, up only 0.9 percent from this past year.

“Higher corn prices are expected to keep carcass weights steady to slightly less than in recent years,” he says. “As a result, most of the increase in beef production will be due to the herd expansion that occurred in 2004-05 as the beef from the retained heifers finally makes its way to market.”

Total red meat and poultry production are expected to increase by 2 percent compared to 2006, he adds, due mainly to increases in pork and poultry production. Stocks of beef are expected to be down slightly at the end of 2007 compared to 2006 due to increased exports.

Longer-term, says Lacy, the continuing drought likely limited or stopped herd expansion in 2006. The University of Georgia, he says, is predicting a zero to 0.5-percent increase in the total number of U.S. beef cows and heifers held as replacements at the beginning of 2007.

Turning to demand for this year, Lacy says the price for feeder cattle and calves is a derived value. “That is, the price cattle feeders will pay is equal to the final value of the product minus the cost of gain and some allowance for profit. Beef demand is expected to remain steady in 2007, which, combined with only marginally increased cattle slaughter, should support prices for live cattle,” he says.

However, higher prices for corn — due to expanding ethanol and export demand — will make feeder cattle cheaper as costs of gain are increased. In the January 2007 crop report, USDA estimated U.S. corn production to be 10.5 billion bushels. USDA also increased expected exports for corn in the 2006-07 crop year.

“The net result is dangerously low projected ending stocks of corn. As a result, cattle feeders will be able to pay less for cattle to finish. Historically, each 10-cent increase in the price of corn decreases 500 pound to 600 pound steer prices by 75 cents to $1 per cwt. Thus, cattle prices will be considerably lower in Georgia in 2007.”

Ethanol production is expected to increase considerably in the next few years, more than tripling by 2009 to 18.2 billion gallons, says Lacy. This increased production is expected to require an additional 775 million bushels of corn. Supplies could tighten dramatically, he says, increasing corn prices and reducing prices for feeder cattle.

For the coming year, says the economist, fed cattle prices are expected to remain virtually unchanged to slightly lower. Heavier-weight feeder prices will be down 10 to 15 percent compared to 2006, and 600-pounds and lighter calf prices will be down 15 to 20 percent compared to last year.

“The relationship between the price of corn and Georgia cattle cannot be overstated,” says Lacy. “If problems with the 2007 corn crop develop, look for calf and feeder prices to decline even more than projected.”

Cow-calf producers, he says, have a better than even chance of covering all of their variable costs in 2007. However, any major break in the market could put some producers at risk as breakeven prices are estimated to about $75 per cwt. for 500 pound to 550 pound calves.

“In 2007, producers will have to contend with lower sales prices and higher feed costs. Even though fertilizer and fuel prices are expected to moderate in 2007, feedstuff prices are expected to be higher.”

If late spring or early summer rainfall is scarce, hay supplies could be reduced even more and prices could approach $100 per ton, says Lacy.

For 2007, cow-calf producers should evaluate stockering or other retained ownership alternatives if they can put the additional pounds on fairly cheaply, he says. “Cattlemen who stocker or finish cattle may see several good buying opportunities this coming year. However, due to the volatility of the cattle market during this phase of the cattle cycle, all cattlemen should avail themselves to any and all price-risk management tools available.”

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