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Ag economist outlines factors behind record highs

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Tight supplies and strong demand propelled fed cattle values into another record-breaking week Feb. 28 to March 4, but cattle feeders' profits are not as lofty as some might expect, according to Kansas State University agricultural economist Glynn Tonsor.

Average prices for cattle in U.S. feedlots hit $112 to $113 per hundredweight March 2--a $1 to $2 increase over the previous week's record-setting prices, according to the U.S. Department of Agriculture. That was $19 to $20 per hundredweight higher than the average price of about $93 a year ago and about $25 per cwt. higher than the five-year average (2005-2009).

"Fed cattle prices are expected to generally increase throughout this year, but profits won't necessarily rise or set historic records because of higher corn and feeder cattle prices," said Tonsor, who spoke at K-State's Cattlemen's Day in Manhattan March 4.

Based on CME live cattle futures, Tonsor said second quarter prices are expected to average about $115 per cwt, third quarter expectations are around $117, and fourth quarter prices are projected to average $119 per cwt.

With regard to beef supplies, Tonsor, who is a livestock marketing specialist with K-State Research and Extension, noted that many cow-calf producers will likely continue to respond to high prices by selling off cows. The shrinking cow herd ensures beef supplies will continue to tighten for months to come.

"That part of the support in (cattle) prices will not change for at least another 18 months as 2013 appears to be the earliest that will change in a national, aggregate sense," he said.

Tonsor said despite the historically high prices feedyards are paying for cattle, some are willing to run at a loss as long as they cover their variable expenses. Both feedyards and processing plants have an over-capacity situation right now, which is helping boost lightweight steer prices beyond some break-even calculations, he added.

Cattle prices also are being boosted by strong demand from U.S. as well as overseas buyers.

"Exports were strong in 2010 and there is every current indication that will continue throughout this year," the economist said, adding that the weak U.S. dollar, compared with other currencies, has benefitted the export scenario.

In addition, the U.S. is importing less beef than it has in recent years, he added, noting that beef and veal imports in 2010 were below the previous year's number and below the most recent five-year average.

USDA data illustrates the supply picture

The USDA on Jan. 28 estimated the total number of cattle and calves in the United States as of Jan. 1 at 92.6 million head, 1 percent below 93.9 million on Jan. 1, 2010. That was the lowest Jan. 1 inventory of all cattle and calves since the 91.2 million on hand in 1958.

In the same report, the number of all cows and heifers that have calved, was pegged at 40.0 million, down 1 percent from the 40.5 million on Jan. 1, 2010. Beef cows were tabbed at 30.9 million, down 2 percent from a year earlier. Milk cows were reported at 9.1 million head, up 1 percent from Jan. 1, 2010.

In addition, all heifers 500 pounds and over, were estimated at 19.5 million, down 1 percent and beef replacement heifers were reported at 5.2 million head, down 5 percent from a year earlier.

The number of steers weighing 500 pounds and over as of Jan. 1 were down 1 percent at 16.4 million head and calves under 500 pounds were down 3 percent at 14.5 million.

The USDA report estimated the 2010 calf crop at 35.7 million head, down 1 percent from 2009 and the smallest calf crop since the 34.9 million born during 1950. Calves born during the first half of 2010 were estimated at 25.9 million, down 1 percent from 2009.

Grain prices and other factors play prominent role in cattle markets

Volatile grain prices are playing a role in cattle producers' reluctance to expand herds, Tonsor said.

"New crop December corn futures have traded up to $6.20 (per bushel) in recent weeks and with any threat to this summer's corn crop we could trade at least at those levels or higher," said Dan O'Brien, K-State extension agricultural economist. "We're on the razor's edge in our projected ending stocks for the 2010-2011 marketing year and current projections from USDA are for the tight supply to continue into the next marketing year."

When conditions are profitable and are projected to stay that way in cattle production, it typically means producers expand their herds, Tonsor said. A current, possibly short-lived oddity about the current situation is that producers have been enticed to sell at the higher-than-usual prices rather than retain cattle for future expansion.

That might lead one to wonder, Tonsor said, if cow-calf producers are strapped for cash or if the average age of producers and possible retirement plans are coming into play. Furthermore Tonsor asks "Is heightened uncertainty at play? If $50-per-head expected profit used to normally trigger expansion, what does it take today?"

He outlined a host of other issues producers should watch beyond today's immediate supply and demand situation, including animal welfare issues: "Social pressures are here to stay. Oprah's recent show talked more about animal welfare than food safety and cattle are not immune." He referred to a recent segment on the Oprah Winfrey Show that dealt with animal welfare issues.

Tonsor cited recent studies suggesting that meat expenditures reallocate to non-meat purchases in response to increasing media attention to the topic of animal welfare.

Other areas to be mindful of include the comparative state of national animal identity and traceability programs with other global meat exporters and associated implications on current and future trade negotiations.

"South Korea as of December, 2010, ruled that all imported meat be traceable," he said, adding that Canada has put into place a national program that facilitates age verification.




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