October 25, 2004
CATTLE PRICES FACE CONTINUED UNCERTAINTIES
The cattle industry should see price benefits
from two recent major announcements. The first is the agreement
between Japan and the U.S. to begin moving toward opening
the Japanese market to U.S. beef that has been closed since
December 23, 2003. The second is the duty placed on Canadian
live hogs being shipped to the U.S. These "price positive"
events will be somewhat offset by higher numbers of cattle
Japan and the U.S. have agreed to re-open beef shipments
to Japan, but the details are still to be worked-out. For
market prices, "the devil is in the details." U.S.
sources have been optimistic that beef could begin to flow
in "a few weeks." Japanese sources, however, are
suggesting "maybe in the spring of 2005." Regardless,
Japan is a huge market. In 2003, Japan purchased 920 million
pounds of beef, representing 36 percent of all U.S. beef exports.
In addition, when Japan and the U.S. reach a final agreement,
South Korea will most likely join in as well. In 2003, South
Korea was the third largest buyer of U.S. beef, representing
an additional 23 percent of beef exports.
A second major event was the recent decision to add a duty
to live hog imports from Canada. This duty approaches 15 percent
of the value of hogs and will have the impact of keeping more
hogs in Canada for finishing and processing. This will tend
to lower hog and cattle prices in Canada, but raise prices
in the U.S. The longer-run impacts are less clear. If the
duty stays in place, it may cause a shifting of finishing
and processing of hogs to Canada.
Adding to the mix of uncertainties for cattle prices is the
question of when the border might be opened to Canadian live
cattle and the specific terms and timing of such an agreement.
There has been a general feeling in the marketplace that a
restricted opening of the Canadian border would occur prior
to the opening of exports to Japan. For now, the timing and
details of each remain uncertain.
A final piece of new information in the cattle market is
the latest USDA quarterly Cattle on Feed report which showed
on-feed numbers to be higher than expected, up 3 percent.
The number of steer calves on feed was up 4 percent, but heifers
on-feed were up only 1 percent. The number of cows and bulls
on-feed were down 7 percent. The smaller number of females
on-feed reflects a growing interest in herd expansion as more
cows are being retained in the breeding herd and more heifers
are being held for potential breeding.
Placements were down only 4 percent and the number marketed
in September was smaller than expected, down 11 percent. Placements
of cattle weighing less than 800 pounds were down a surprising
11 percent, reflecting the limited number of young cattle
available for feedlots.
What does this mixed set of events and numbers mean for beef
supplies in coming months? While the announcement that the
U.S. and Japan will open trade is initially positive, it is
not likely to happen for several months as details are worked
out. This leaves the immediate issue of higher than expected
on-feed numbers. Added to larger numbers will be much heavier
market weights due to low feed prices and abundant forage
supplies. In October, cattle weights have been up over 4 percent
and these heavy weights will continue into the winter. As
a result, beef supplies will be higher by 2 to 4 percent in
the last quarter of 2004 and the first quarter of 2005.
Finished cattle prices should move seasonally higher, however,
and may approach the $90 level by the end of the year. Prices
are expected to average in the higher $80's in the first quarter
of 2005, but to peak in the late-March to early-April period
in the low $90's. Prices are then expected to move lower seasonally
into the summer, with averages in the low-to-mid-$80s.
The two large uncertainties revolve around trade. The issue
is not just when trade between the U.S., Canada, and Asia
can be restored, but the terms of these potential agreements.
Opening beef exports to Asia could enhance finished cattle
prices by $5 per live hundredweight or more, while opening
imports of live cattle from Canada, in the absence of opening
exports to Asia, could depress prices by $2 or more. Odds
now seem to favor that BSE issues will be resolved in the
next six months. This would allow the establishment of a framework
under which limited beef trading between the U.S., Canada,
and Asia can begin once again.
Issued by Chris Hurt