Cattle Market Situation and Outlook
John D. Anderson
Mississippi State University
During the week of September 8, an unprecedented occurrence was observed in the fed cattle
market. Significant numbers of fed cattle were traded at a price of $90/cwt. While the average
price for the week was slightly below that figure, the breaching of the $90 barrier must certainly
be considered a significant milestone. The fact that this milestone was reached in early
September was significant in itself. Fed cattle market highs do not often come in the summer,
when supplies are typically at or near their peak.
Stratospheric prices in the fed cattle market also found their way down to the feeder cattle
market as well. The same week that fed cattle were selling for $90 per hundredweight, feeder
cattle in the 700 – 750 pound weight category at Oklahoma City sold for an average price of
$103.91 per hundredweight. What may be as important as what these prices say about current
strength in the market is what they reveal about the psychology of market participants. A 725pound steer costing $750 will break-even coming out of the feedlot at $85 to $87 per
hundredweight. That is about $5 per hundredweight over what the February live cattle contract
was offering during the week that these cash prices were established.
How did the market get to this point? These developments are especially interesting in light of
the fact that just about a year ago, cattle feeders were losing money at a prodigious rate.
Market watchers were concerned last fall that the severe losses incurred by cattle feeders over
the prior 18 months would seriously constrain their ability (not to mention their willingness) to
purchase stockers and feeders.
The old marketing adage that “nothing cures low prices like low prices” proved to be true in the
cattle market in 2003. A string of unfortunate events in 2002—a foot-and-mouth disease scare
in Kansas, a ban on U.S. poultry imports by Russia, unexpectedly large hog numbers—
conspired to keep cattle feeders wallowing in red ink for most of the year. But beginning in June
of that year, placements of cattle into feedlots began to fall significantly below the 5-year
average. By the last quarter of the year, total on-feed numbers were below that average as
well. Figures 1 and 2 illustrate placements into feedlots and total on-feed numbers,
respectively.
Avg. 98-01
2002
2003
Avg. 98-01
N
ov
Se
p
Ju
l
ay
N
ov
Se
p
Ju
l
ay
M
ar
M
Ja
n
800
M
1300
ar
1800
M
2300
12000
11500
11000
10500
10000
9500
9000
8500
Ja
n
2800
1,000 head
1,000 head
3300
2002
2003
Source: USDA Cattle on Feed Report
Source: USDA Cattle on Feed Report
Figure 1. Fed Cattle Placements
Figure 2. Cattle on Feed
As marketable supplies decreased in the last quarter of 2002, fed cattle prices began to
improve. By early 2003, fed cattle prices were challenging $80 per hundredweight. In
February, it looked like the high price for the year had been established at about $81.75 per
hundredweight.
Higher cash prices (with a strengthening basis) encouraged feeders to market cattle more
aggressively in early 2003 than they had in some time. This accelerated pace of marketings
had a couple of positive effects on supply fundamentals in the market. First, it did a great deal
to clean up market-ready supplies of cattle. Second, it led to a decline in fed cattle weights,
contributing to a reduction in total beef production. Figure 3 shows average fed steer dressed
weights. As this figure shows, fed steer dressed weights are now just about in line with the
1999-2001 average.
1,000 head
850
830
810
790
770
Avg. 99-01
2002
N
ov
Se
p
Ju
l
ay
M
ar
M
Ja
n
750
2003
Source: USDA Livestock Slaughter Report
Figure 3. Fed Cattle Dressed Weights
The significance of the fact that feedlots had become very current with their marketings by midspring of 2003 became apparent on May 20, when a single case of bovine spongiform
encephalopathy was discovered in Alberta, Canada. Because of this incident, the U.S. (along
with every other beef importing country) closed its border to Canadian cattle and beef. The
effect of this action was twofold. It resulted in a reduction of supply of about 5% to 7%, and it
allowed the U.S. to capture a greater share of world export markets.
With reduced supplies of cattle and beef, unexpected export demand, and strong domestic
demand, fundamentals in the cattle market looked exceptionally strong. One factor holding the
market back somewhat in the mid-summer months was the presence of large numbers of
grazing cattle in feedlots. The 2002/03 wheat pasture grazing season had been exceptional,
and large numbers of heavy feeder cattle hit feedlots from about mid-March to mid-May. These
cattle numbers supported a high level of cattle slaughter at prices that now seem fairly
moderate—mid- to high $70’s per hundredweight.
The rapid pace of cattle slaughter pulled cattle quickly through the supply chain. By the middle
of August, the wheat pasture cattle were gone, and competition for remaining supplies led to the
dramatic run-up in prices mentioned earlier. The question on everyone’s mind now is how long
will these good times last?
One of the difficulties in answering this question relates to the situation in Canada. In late
August, import permits were approved for the import of boneless muscle cuts of beef from
animals no more than 30 months of age; however, it is still uncertain how long imports of live
animals will remain restricted. In the September 11, Sparks Policy Report, it was reported that
live animal imports are still months away, but official pronouncements on the topic have
specifically avoided establishing a timetable. On a related note, it is not clear how many
animals will be ready to come down from Canada when the ban is lifted. Certainly, Canadian
slaughter has slowed significantly since May 20. But the number of cattle on feed in Canada
was quite small at that time. Since then, placements into feedlots have slowed significantly as
well. Placements into Canadian feedlots during May, June, and July were 53%, 12%, and 29%
of the previous year, respectively. As a result, in spite of the slowdown in Canadian marketings,
the September 1 on-feed number (as a percentage of the 2002 number) was smaller than the
May 1 on-feed number. The point is that the BSE situation does not seem to have cattle backed
up in Canadian feedlots.
While feedlots appear not to have become backed up in Canada, it is more difficult to assess
how many heavy feeders remain outside of feedlots. The U.S. and Canadian Cattle report
released by NASS in July indicates that Canadian stocker and feeder calf numbers in 2003 are
slightly higher than in 2002. Thus, significant numbers of calves may remain outside of
Canadian feedlots as producers attempt to slow down the production cycle in hopes of riding out
the worst of the BSE situation. These calves cannot remain outside of the feedlots indefinitely.
In fact, it is likely that many will find their way into the feedlot as summer pastures play out.
Alternatively, if the ban on Canadian feeder cattle is lifted within the next couple of months,
many of these feeders would likely come across the border, resulting in large placements in
U.S. feedlots.
On the demand side of the price equation, there is little doubt that beef demand has been quite
strong in 2003. Through August 2003, total beef production was virtually unchanged from 2002;
however, over that same period of time, the average boxed beef cutout value and the average
fed cattle price were both up about 17% compared to the previous year.
Moving into the fourth quarter of 2003, fundamentals in the cattle market look exceptionally
strong. Demand for beef remains healthy, and the supply of cattle that was already cyclically
low has been taxed even further by the rapid pace of cattle slaughter through the summer
months. Supplies of competing meats should not become burdensome, although broiler
production has begun to increase over last years levels in the past three months or so.
As noted, this past spring, the fed cattle market hit a high of around $82 per hundredweight. If
anything, market fundamentals should be better next spring, indicating a high approaching the
mid-$80’s per hundredweight; however, futures prices on the Chicago Mercantile Exchange do
not yet anticipate spring prices being that high. April live cattle futures in the third week of
September were trading well below $80 per hundredweight. In fact, the live cattle futures
market for a good portion of the summer has displayed an atypical price pattern. Prices on the
board are progressively lower for contracts further from maturity. This pattern bears little
resemblance to typical seasonal supply and demand fundamentals and most likely reflects a
risk premium on more distant months. Certainly, the Canadian situation is contributing to
uncertainty in the market. Moreover, with prices now in uncharted territory, traders are likely
unsure of where things may go from here.