Market Advisor: Cattle Prices Before And After BSE

The year 2003 will certainly be a year that cattle producers talk about for years to come. Prices for all market classes of cattle moved cyclically higher throughout the year, only to come crashing down after Dec. 23 when USDA announced that a dairy cow in Washington had tested positive for Bovine Spongiform Encephalopathy (BSE), commonly called mad cow disease.

Prices for most market classes of cattle declined 15 to 20 percent after the announcement.

Cattle prices were especially volatile during the fourth quarter of 2003. Fed cattle prices at Nebraska packing plants averaged near $80 per hundredweight for much of the year, but then climbed to close to a $90 average in September, $105 in October, and $102 in November.
Prices averaged about $95 per hundredweight in December until the steep decline to $75 after the BSE announcement.

Several factors caused the higher prices. Beef production fell due to fewer cattle being marketed from feedlots and sharply lower slaughter weights. The number of fed cattle marketed from feedlots in November was 11 percent below the previous year and dressed weights averaged 30 pounds lighter. The fewer number of cattle was a result of seven consecutive years of declining beef cow numbers in the United States because of drought in important cattle producing regions.

Strong domestic demand for beef led by low-carbohydrate diets and development of consumer-friendly beef products helped fuel prices. Export demand was also strong and aided by several countries banning Canadian beef due to the earlier BSE case there.

The reason why fed cattle prices fell dramatically after the announcement is because beef importing countries, excluding Canada, immediately stopped importing beef from the United States. Japan, Mexico, and South Korea are the three largest customers for U.S. beef exports and accounted for 82 percent of the total in 2002. Canada accounts for about 10 percent and about 30 other countries make up the other 8 percent.

The loss of 90 percent of the beef export market is what hurt prices, and regaining that market will be critical for prices to improve. Mexico may resume trade within the next month, but Japan and South Korea are expected to restrict U.S. beef inports for several months and possibly longer.

Domestic consumer demand will be a critical factor in future fed cattle prices. Early indications are that consumer demand remains good. Barring another case of BSE being discovered or a different disaster, fed cattle prices should average in the mid $70 per hundredweight in the next two months.

Feeder cattle prices also rebounded in 2003 as a result of fewer numbers, a large corn crop, and the higher fed cattle prices. Average prices for 550-600 lb, medium- and large-frame number 1 feeder steers at North and South Dakota auctions averaged $109 per hundredweight in November 2003 compared to $87.75 in November 2002.

Very few feeder cattle are marketed during the last two weeks of December because many livestock auction markets are closed during the holidays. However, the first full week of January is typically the largest feeder cattle sales volume week of the marketing year at North Dakota and South Dakota auctions. Several markets hold special feeder cattle sales that week. Early indications (this article was written on Jan. 6) are that runs are much lighter than usual as producers are waiting to see what the new price level is.

The limited sales of feeder cattle are averaging 15 to 20 percent below pre-BSE announcement levels. Backgrounded feeder steers weighing 700-800 lbs. have been selling the in low to high $80's depending on quality and other factors that affect market prices.

These prices are consistent with what feedlots can pay, given deferred live cattle futures contracts that are trading in low to mid $70 per hundredweight. and costs of gain are in the low $50s per hundredweight. Buyers will likely be reluctant to pay higher prices for feeder cattle than can be hedged on the futures market.

Cattle futures markets are likely to be quite volatile as new information, both positive and negative, becomes available. Feedlots will continue to need replacement feeder cattle to feed the large corn crop to, so buying activity at markets should be good.

Feeder cattle producers that have feeder cattle to market should continue to market according to their original marketing plan. Holding cattle after they reach market weight and grade usually does not pay in crisis situations. Significant price improvement is unlikely as long as most export markets for beef remain closed.

The normal seasonal price pattern for heavyweight feeder cattle exhibits a downward pattern into February and March as increasing supplies of backgrounded and winter wheat pasture cattle become available.

Producers should contact their auction market prior to marketing for information on local market conditions.

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