October 22, 2001
CATTLE INDUSTRY SUFFERS FROM
The cattle industry has perhaps
felt the most severe impact of the events of the late summer and
fall. At the beginning of September, finished steer prices had
dropped to $70, a level that most felt would be the low for 2001.
It was expected that prices would rise into the fall. But the
events of September 11 and mad cow disease in Japan have changed
those expectations. By early October, prices had dropped to the
mid-$60s, as confidence in beef demand was shaken. Demand for
high valued beef cuts for the hotel and restaurant trade dropped
as business and vacation travel declined. Concerns about slowing
economic growth has dampened demand for high value cuts in the
at-home market as well. In addition, declining beef demand in
Japan has also hit the high valued cuts. In sum, each of these
events has pushed more of the high end cuts back into the grocery
store market where a cautious consumer has been hesitant to buy.
Not only are consumers cautions,
but cattle feeders are as well. In September, feedlot managers
in the U.S. placed only 2.1 million head of cattle, a 20 percent
reduction from placements of last year. Their caution is understandable
given the massive uncertainties which developed after September
11 and contributed to a decline of $7 per hundredweight in the
December futures price. This is the smallest number placed in
September since the modern report period began, and means that
beef supplies late next winter and early spring may be down somewhat.
This anticipated reduction could help support futures prices for
that time period.
Unfortunately, as cash and futures
price expectations declined in September, feedlot managers may
also have been holding cattle back, hoping for some price recovery.
One indication of this is that the number of marketings were off
sharply in September, down nine percent from marketings of one
year ago. The number marketed was smaller than had been anticipated
and will provide a bearish tone for cattle prices this fall. A
second indication is that marketing weights increased starting
in late September. During most of the summer, marketing weights
were below year earlier levels. However, in the past four weeks,
market weights have been about one percent higher than last year.
These factors mean that beef supplies will be somewhat higher
this fall than had been anticipated.
This fall, beef supplies will be
over two percent higher than last year's fourth quarter supply.
Winter supplies are expected to be up about three percent. Supplies
may finally begin to decline in the spring quarter, when they
could be down about one percent. Summer supplies may be down about
Perhaps the most immediate concern
is the nature of demand. Grocery stores are being asked to move
more of the higher quality beef cuts that had been going to the
restaurant trade. Expect them to respond with greater featuring
of these high value cuts in coming months. Recovery in beef exports
to Japan does not look promising, as consumers there will likely
make sharp reductions in total beef consumption. Reports this
fall are that beef consumption is off 20 to 30 percent for domestically
produced beef, and down 10 to 20 percent for imported beef. To
some extent, much damage has already been done to beef demand
there, but whether additional cases of mad cow are found will
also be of significance.
Demand in the U.S. is expected to
be slow to recover as consumers wait to see just how much slowdown
occurs in the U.S. economy, and the implications for unemployment.
Business and vacation travel will also recover over time, the
rate of which will depend on the unfolding events of the war on
terrorism and further terrorist acts in the U.S.
Cattle markets always have the element
of uncertainty, but that uncertainty is heightened this fall.
From current prices, the trend is expected to be upward. Live
steer prices may average in the higher $60 this fall, before moving
into the low $70's for the first quarter of 2002. With falling
beef supplies, and perhaps a more confident consumer, live steer
prices could average in the mid to higher $70 for the spring quarter
Feeder cattle prices have also been
rattled. In early September, 600 to 700 pound Oklahoma feeder
steers were trading in the mid to higher $90s. This past week,
those prices were in the mid $80s to low $90s. But, feeder cattle
and calf prices may recover more quickly than finished cattle
prices. Not only will the upward trend in finished cattle prices
be positive for feeder cattle, but low interest rates and cheap
feed will be as well. Cattle feeders will be more risk averse
than usual, meaning that they will be more likely to hedge cattle
placed on feed. Therefore, strength in the futures contracts for
the late winter and spring will be quickly bid into younger cattle
Issued by Chris