With average prices in the upper-$70s and lower $80s over the first two months of the year, most beef producers have begun to wonder: How long can these prices last?
Say good night. One look at the futures markets would leave an observer to believe that the party ends after April, with a $6 drop between the April and June contracts and with little upside thereafter.
If we take recent futures market prices and adjust them for typical basis from eastern Pennsylvania markets, we’d predict low choice cattle will average in the upper $60s for most of July to December.
Another view. However, if you plug USDA’s predictions for the third and fourth quarters’ production into most structural models (i.e., models based upon recent patterns of supply and demand), we get predictions in the mid-$70s for the third quarter and in the upper $70s or low-$80s for the fourth quarter – much more optimistic than the current futures prices.
Who’s right? How do we reconcile this difference? Well, obviously futures market traders, a) think USDA’s production forecast is way too low or, b) don’t believe the price will be as high as normal for the given supply (i.e., weak demand) or, c) both.
Consider USDA’s production forecast. If slaughter weights in 2003 are the same as 2002, the USDA’s forecast implies that 1.6 million fewer cattle will be slaughtered in the last half of 2003 than in the last half of 2002.
As of Jan. 1 of 2003 the count of all U.S. cattle was only down 600,000 from a year earlier, however.
Now, in terms of beef cattle, there were about 900,000 fewer cattle on feedlots as of Feb. 1, 2003, than year earlier. However, an additional 900,000 more cattle were on wheat pasture, which means that, on net, there shouldn’t be much difference from these two sources, but that more cattle will come to market later in the year rather than earlier.
Furthermore, during January and February of 2003, we slaughtered 200,000 fewer head than year previous. That means were may have already burned through one-third of the smaller total population we expected.
Huge imports unlikely. Can a change in cattle imports yield a large enough reduction in slaughter to deliver the needed decline in second half slaughter? Probably not.
The Canadian calf crop of 2002 was virtually unchanged from 2001, suggesting imports from Canada should be similar.
Furthermore, we might expect more imports from Mexico as they have adjusted to new health regulations which slowed their pace of exports in 2002.
In short, USDA’s forecast does appear too low. A more realistic slaughter forecast still leaves the futures market prediction about $4 to $6 on the pessimistic side, however.
That means the market is betting on poor demand. For example, most structural models predicted prices about $4 too high for post 9/11 beef demand.
We might say the futures market is betting on a demand hit of a similar size as was seen in late 2001 and early 2002.
Korean influence. We must also consider the possible downside of the ‘other’ war threat: North Korea.
Beef exports have remained strong despite sluggish Japanese demand because of large increases in purchases by South Korea.
Instability on the Korean peninsula could undermine the demand of a country that consumes about 2 percent of all U.S. beef production.
Bottom line. So, with war in the air, the economy still struggling, and energy prices spiraling, recent futures market prices for fed cattle are not unreasonable.
However, we should note that beef demand over the past two quarters has been quite strong.
So, if the economy remains stable and there are no substantial domestic terrorist attacks or other hits to the domestic economy, there is some limited upside for beef prices over what recent futures markets are predicting.
That is, a return to $80 in fall and winter is not likely, but low- to mid-$70s is a possibility.
(The author is an extension livestock economist at Ohio State.)
