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"The Canadian situation has clearly
contributed to record high cattle prices and premiums over hogs,"
said Chris Hurt. "Who are the winners and losers? The U.S. cattle
industry and Canadian beef consumers have been the primary
beneficiaries of an event that involved one cow with a positive BSE
(mad cow disease) test. The losers have been the Canadian cattle
industry, U.S. beef consumers and U.S. pork producers."
Hurt's comments came as he reviewed
recent livestock prices. A milestone was recently passed in the
livestock industry as the live cattle futures price passed the
previous record high of $84.30 reached in March 1993. The new high
futures level (to date) of $84.90 was reached on Aug. 28.
"On the other hand, hog prices are much
lower," Hurt noted. "On the same day, the daily high of the nearby
live hog futures price, when converted to a live weight, was $40.77.
What a contrast. Live cattle futures were trading at a $44.13 per
hundredweight premium over the approximate equivalent live hog
futures."
Cash cattle prices are setting records
relative to cash hog prices as well. In the first eight months of
this year, cash steer prices have averaged about $38 higher than
cash hog prices, measured as the live equivalent of 51 percent to 52
percent lean hogs. The previous record annual cattle premium was $33
per hundredweight in 1992. While current premiums are high, premiums
of cattle prices over hog prices have been trending upward for
several decades.
"What is contributing to the growing
premiums for cattle?" Hurt asked. "Three factors stand out. Longtime
observers of the livestock industry know that the wide swings in
price relationships of cattle and hogs are not new. Perhaps the most
dominant factor causing price variability is the changing supply
across the production cycle. The beef production cycle tends to be
about 10 to 12 years in length. The current cycle is unusually long,
now up to 14 years, and is at the low production point."
The hog production cycle, however,
tends to be about 3.5 to four years in length, Hurt added.
"Currently, we are in a mild liquidation phase of the cycle, yet
pork production has just barely begun to come down," he said. "Thus,
cattle production is at 'low tide' and hog production is still
fairly close to 'high tide.' Obviously, separate production cycles
of widely different length cause large fluctuations in relative
prices over time."
[to top of second column in
this article]
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The second issue, Hurt said, covers a
range of topics. Many argue that the "industrialized" nature of the
hog industry has reduced costs, narrowed profit margins and resulted
in an industry that is slow to make downward adjustments in supply.
In addition, beef demand seems to have improved in recent years,
while pork demand has been more stable. Each of these contributed to
higher cattle prices relative to hog prices.
"Finally, the current cattle price
premiums are clearly related to the May 20 to Aug. 8 closing of the
Canadian border to beef shipments due to the BSE-positive cow," said
Hurt.
"For cattle, U.S. supplies were sharply
curtailed this summer as over 8 percent of the 2002 beef supply had
Canadian origins. Somewhat over one-half of the total came as live
cattle and the other portion as processed beef. The Canadian supply,
of course, dropped to zero after May 20."
Hurt said smaller supplies with a
stable demand in the United States meant higher live cattle prices,
and feedlot managers further responded with lighter marketing
weights as they made every attempt to get more cattle to market
before prices collapsed. Marketing weights since May 20 have been
down by about 3.4 percent from the same period in 2002.
"Hog prices have been lowered due to
the BSE cow in Canada," he said. "While the border was closed to
beef, it was open to pork. The only outlet for Canadian beef this
summer has been the Canadian consumer. Canadian consumers increased
beef consumption, which displaced some pork consumption. Pork and
hog flows then increased to the United States.
"For processed pork, June imports from
Canada increased by 13 percent over May. The flow of live animals
has also increased."
Slaughter hog imports from Canada were
about 1.5 percent of slaughter in early May but expanded to 3
percent of slaughter by mid-August. In 2002, Canadian live hog
imports (feeders and slaughter hogs) represented 5.7 percent of
slaughter. By August of this year, the rate was exceeding 8 percent.
"Perhaps no
one cow ever had such a large economic impact," said Hurt, referring
to the Canadian cow that tested positive for BSE. "Even Mrs.
O'Leary's cow in Chicago only burned one town, while this one cow
caused large economic distortions of livestock economies throughout
an entire continent."
[University
of Illinois news release]
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