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Weekly outlook: cattle     Send a link to a friend

[FEB. 3, 2004]  URBANA -- Cattle prices could be extremely volatile in 2004, with both higher and lower price movements, and feed prices could also have wide swings, said a Purdue University Extension marketing specialist.

"This is an environment in which producers need to consider price risk management, including the use of futures or options for hedging corn, soybean meal, feeder cattle and finished cattle prices," said Chris Hurt.

Hurt's comments came as he reviewed the outlook for cattle prices in 2004. The case of a dairy cow that tested positive for mad cow disease in Washington State brought much uncertainty to the cattle outlook for the year, but current inventory numbers suggest even smaller domestic beef production.

"The size of the nation's beef cattle herd continues to decline, even in the face of record-high prices in 2003, clearly showing that producers' initial reaction to high prices was to sell breeding stock and heifers rather than retain them for herd growth," said Hurt.

As of Jan. 1, the total number of cattle and calves had dropped to 94.9 million -- 1 percent below last year's inventory and the lowest number in the herd since 1959. Beef cow numbers dropped by about one-half of a percent, to the lowest number since 1991. The continuing drought in the west central Plains appears to be one of the important reasons why national beef cow numbers continue to drop.

"Beef cow numbers were down 13 percent in Colorado and down 4 percent in Nebraska, Oklahoma and North Dakota," said Hurt. "Further east, Missouri's herd was about unchanged, Illinois was up 1 percent, and Iowa and Indiana were each down about 1 percent.

"Producers are expected to be hesitant to increase herds in 2004 with the uncertainty of implications surrounding mad cow disease. Producers indicate that they hare holding back 2 percent fewer heifers, which will mean continued small cow numbers in the July midyear update."

Low milk prices and strong cull cow prices also encouraged dairies to reduce the number of milk cows by 2 percent in 2003.

"At 9 million head, milk cow numbers are at the lowest since 1868 -- yes, three years after the Civil War ended," Hurt noted. "Continued reduction in the size of the milk herd is anticipated this year, as the numbers of heifers being retained to go back into the herd is down 2 percent."

Many are wondering how mad cow disease will impact trade in 2004. Hurt said that no one knows the answer with a high degree of confidence, so a set of assumptions needs to be made.

"For this analysis, it is assumed that domestic demand is not affected by mad cow disease and that U.S. exports are lost for the first half of 2004 but restored in the last half," he said. "In addition, it is assumed that imports are reduced by 15 percent in the first half and restored in the last half of 2004. The net effect of these trade impacts is that an additional 8.5 percent of our domestic production will need to be consumed in the United States in the first half of the year.


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"With the loss of 8.5 percent of net trade in the first half of the year, domestic beef supplies are expected to be up by 5 percent in the first quarter and by 3 percent in the second quarter. Assuming trade is resumed in the last half of the year, domestic supplies will drop by about 4 percent. It is important to realize that differences in these flows can have dramatic impacts of $5 to $10 on cattle prices. Volatility and rapidly changing prices could be expected characteristics of 2004 cattle prices."

Prices of Nebraska choice steers averaged a record $84.69 per hundredweight in 2003, capped by an average of $99 in the last quarter. Given the assumptions for trade above, finished steer prices are expected to average in the very high $70s or low $80s in the first quarter, drop to an average in the mid-$70s in the second quarter, recover a couple of dollars in the third quarter, and be in the low $80s in the final quarter.

While finished cattle prices will be sharply lower than last year's record, these price forecasts provide a yearly average price in the higher $70s and would be the second or third highest annual price on record -- 1990 was $78.56 and 2003 was $84.69.

"Feeder cattle and calf prices will be lower than last year's prices, as the double hit of lower fed-cattle prices and higher feed costs cuts into bids," said Hurt. "In 2003, steer calves at Oklahoma City weighing 500 to 550 pounds averaged $103 per hundredweight. This year, the same calves are expected to average in the mid-$90s.

"Heifer calves at the same location in the 450- to 500-pound range averaged $95 per hundredweight last year and are expected to be near $90 for an average price this year, with prices in the low $90s early in the year and dropping to the high $80s in the summer and fall."

Feeder steers at 750 to 800 pounds at Oklahoma City averaged $90 in 2003 and are expected to average in the low to mid-$80s this year, he added.

"The best news is that mad cow disease, so far, has not had the devastating impacts some feared," said Hurt. "Loss of exports and higher feed prices are offsetting still smaller cattle production in 2004 and likely moving cattle prices lower.

"However, brood cow operations should still be able to cover all costs of production, and finished cattle prices could be surprisingly strong. Obviously, some cattle feeders that were unhedged on Dec. 23 may have suffered large financial losses."

[University of Illinois news release]

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