Strong cattle markets predicted

Cattle market prices for 2008 should remain cyclically strong, averaging higher than a year ago. However, the market has the potential for some big price swings, says Walt Prevatt, Auburn University Extension economist.

“Abrupt changes in certain factors could add much volatility to 2008 cattle market prices,” he says. “Weather and corn prices likely will be the dominant factors affecting beef cattle prices during 2008.”

Current expectations for the Jan. 1, 2008, U.S. cattle and calves inventory estimate will show a decrease, he adds. “If this occurs, this will equal the shortest expansion period of all recorded cattle cycles. A combination of higher production costs, large levels of competing meats, and dry weather in the Southeast, Southwest, and parts of the Corn Belt are thought to be the major factors responsible for causing cattle liquidation to occur,” he says.

One factor that can affect feeder calf and feeder cattle prices is the price of corn next year, says Prevatt. “With the continued development and expansion of ethanol plants, we should continue to see strong demand for corn. Corn prices are expected to be higher during 2008, with December 2008 corn futures at the CBOT currently trading at $3.97 per bushel, he said in mid-October.

Some analysts, he adds, question whether the December 2008 CBOT corn price of $3.97 per bushel is sufficient to bring the necessary additional acres into corn production, especially with July 2008 wheat trading at $5.82 per bushel and November 2008 soybeans trading at $9.18 per bushel.

“If it doesn't, corn prices will likely move much higher,” says Prevatt. “Additionally, pasture and range conditions have not been favorable over many of the cow-calf states this year. Particularly hard hit this year has been the Southeast, Southwest, and parts of the Corn Belt states.

“These poor and very poor pasture and range conditions have contributed to a higher level of cull cows moving to slaughter this year. Recent modest amounts of rainfall have been received in some of these areas. The pasture and range conditions as of Sept. 9 were rated as poor or very poor on 36 percent of the U.S. acreage in pasture and rangeland. Significant rainfall deficits in many of these areas are the result of two-plus years of dry weather. Substantially more rainfall is needed in many of these states to restore water tables and normal forage production.”

Total 2007 U.S. hay production is expected to be marginally larger than a year ago, according to Prevatt. “However, recall that 2006 hay production was adversely affected by the drought. So, hay supplies will be in tight hands. In the Southeast, several states are expected to harvest about one-half of normal hay production levels.

“This will result in much higher hay prices in those areas affected by the drought. Both quantity and quality of hay have been adversely affected by the drought. Alternative winter feedstuffs will be in much demand this winter as cattlemen seek to feed their cow herds. Thus, the cost to winter cattle this year will be higher. The drought will no doubt have a significant effect on cattle production costs and the herd reduction in these areas,” he says.

U.S. beef exports are expected to show growth during 2007 and 2008, says Prevatt. The opening of beef trade with Japan and South Korea during 2007 offers added opportunity to increase U.S. beef exports in 2008.

“Future export growth is expected to be gradual. It may take three to five years to reach pre-2003 U.S. beef export levels. However, the increase in U.S. beef export levels should help provide price support to the U.S. beef industry. U.S. export levels of beef and competing meats (pork and poultry) will likely have a significant impact on U.S. beef prices during the next couple of years.”

Assuming stable domestic consumer beef demand, the combination of a slight decrease in the U.S. net beef supply coupled with increases in the net broiler supply and the net pork supply will limit beef price increases during 2008, says Prevatt. “However, any significant changes in domestic beef demand, domestic beef production, and/or export and import levels of these three competing meats could cause major movements in beef prices. Each industry is very capable of significantly altering production levels and subject to wide changes in export and import levels.”

A significant factor in the net beef supply during the next several years, says the economist, will be the beef balance of trade (beef exports minus beef imports). In 2008, U.S. beef exports are expected to total about 1.70 billion pounds while U.S. beef imports are expected to total about 3.32 billion pounds.

“This results in a beef trade deficit of about 1.62 billion pounds. Thus, if U.S. beef production grows over the next several years, it is extremely important that we realize significant improvements in U.S. beef exports if we want to avoid burdensome levels of net beef supplies. It would be highly advantageous to cattle farmers if we could grow our beef export levels similarly to the expected increases in domestic beef production.”

Beef demand, says Prevatt, was relatively stable during the first three quarters of 2007. “Beef demand felt some challenges the last two years due to less interest in protein diets and some consumers who experienced reduced grocery budgets due to higher energy prices and interest rates. Beef demand is expected to remain stable for the rest of 2007 and 2008. Per capita consumption of beef is expected to remain in the mid-60s (pounds per person) through the rest of the decade, assuming some growth continues in beef exports.”

The 2008 cattle market will continue to operate with a great deal of uncertainty, says Prevatt. “Cattle farmers should monitor several factors, he says, including the length, extent, and severity of the drought, growing supplies of broilers and pork, export and import sales (beef, broilers, and pork), and consumer beef demand. The cattle markets could experience some volatile movements with abrupt changes in any of these factors or combinations of factors.”

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