By Curt Thacker
KANSAS CITY (B)--Market analysts seem to be speaking with one voice when saying beef demand must remain strong throughout the second half of the year to keep U.S. fed cattle prices from sliding to levels well below feeders' calculated break-even costs.
Lower prices already are projected for much of the remainder of the year, but cattle feeders face the challenge of continuing to market their animals aggressively, even when they are losing money, to prevent the market from eroding further.
Cattle-on-feed numbers as of June 1 were record large for the new data series, which began in 1992, ensuring large supplies of beef throughout the balance of the year. Some analysts have projected beef production this year will eclipse the all-time record of 26.386 billion pounds set last year.
Chuck Levitt, analyst with Alaron Trading Corp., is one of those forecasting this year's output will hit a record. With the latest on-feed report, "we tied the final knot--almost assured ourselves of producing more beef than ever before," he said. How the fed cattle market performs from here "depends on demand--the sustaining force of the market."
Cattle feeders must continue to market their animals aggressively, even when they are losing money, Levitt said. If not, they will back up cattle in the yards this fall. "It's a pay-me-now-or-pay-me-later situation," he said.
University of Missouri agricultural economists Ron Plain and Glenn Grimes in their latest weekly cattle outlook report said demand for beef at the consumer level for the January-April period was up 4 to 5%, and demand for choice steers was up 7 to 8%. This is the second consecutive year of demand growth at the consumer level following 20 consecutive years of demand losses.
In a phone interview, Plain said factors driving the demand growth for beef include, among others, the strong U.S. economy, low unemployment and an improved image enjoyed by beef. He added that in May, the average price for all cuts in a choice beef carcass rose to a record high $3.088 per pound, topping the previous record of $3.054 hit in April. The May figure was up $0.256 per pound from a year ago.
Plain expects the U.S. economy to continue to do well through the third and fourth quarters of the year and for beef demand to remain strong.
There are some wild cards, however. Plain added that the Federal Reserve is attempting to slow the economy, which might lead to concerns about beef demand ahead. And, the numbers of cattle placed into feedyards have been high enough for a long enough period to make one concerned that inventories are larger than those reflected in the U.S. Department of Agriculture's biannual cattle inventory reports.
Other analysts agreed, saying the U.S. Department of Agriculture probably will upwardly revise the Jan. 1, 2000, inventory numbers when it issues its Jan. 1, 2001, report. Joe Kropf, analyst with Kropf & Love Consultants, said heifers still are not being retained for breeding, but added this is only a small part of the equation. And, although producers in some areas of the country have suffered through drought conditions this spring, he did not see enough cattle moving out of these areas and into feedyards to be of significance. Therefore, he concluded USDA's cattle inventory figures were underestimated.
Levitt calculates that the Jan. 1 inventory may be off by at least 500,000 head. He also said it appears the industry is heading for another 12-year cycle, just the second in nearly the past 60 years.
Levitt said cycles, prior to the current one, since the 1940s have included one 12-year, two 11-year, one 10-year and two nine-year periods.
A full cattle cycle is the number of years it takes for the herd to expand from its lowest to highest level then decline to another low point. Thus the number of years between two peaks, or two low points, is considered one cycle. Producers expand the herd when prices turn profitable, then sell more of their cows when operating at a loss.
Most analysts contacted said they had downwardly revised their earlier average price projections for the third and fourth quarters due to continued heavy placements of cattle into feedyards.
Andrew Gottschalk, analyst with RJ O'Brien, said that in previous forecasts, he had expected the spring highs of $74.00 per hundredweight to be retested during the November-December period. But now, the supply of cattle will limit any upside the balance of the year to $70.00 to $72.00.
Kropf also said he revised his previous estimate for cattle prices by $3.00, from $74.00 to $71.00, after the latest cattle-on-feed report. Plain said he has pulled about one dollar out of his third- and fourth-quarter price forecasts in each of the past three months due to the continued high on-feed and placements numbers.
Average price estimates for the third and fourth quarters were as follows:
--Gottschalk $68 for the third quarter, $70 for the fourth.
--Kropf $67 to $68 for the third quarter, $71 for the fourth.
--Levitt $66 to $68 for the third quarter, $68 to $70 for the fourth.
--Plain $68 to $70 for the third quarter, $70 to $72 for the fourth.