July 30, 2004
Market Advisor: Has Cyclical Cattle Herd Rebuilding Started?
USDA-NASS released several important cattle related reports from July 21-23. The July 1 Cattle, July 1 Cattle-on-Feed and the June 30 Cold Storage report all give some indication of cattle and beef supplies for the next six months.
The July 1 Cattle report released on July 23 showed a continued slight year-to-year decline in the total U.S. cattle inventory. The July 1 report is an abbreviated report compared to the more in-depth, state-by-state analysis that is included in the Jan. 1 report.
This marks the ninth straight yearly decline in cattle numbers, which began in 1996. Four years of liquidation is a normal occurrence in the cattle cycle, but nine years of liquidation is very rare. Of course, the reason for continued liquidation is dry weather conditions in much of the cattle producing areas, including much of North and South Dakota, Montana and Wyoming. Cattle prices have been high enough the last several years to stimulate herd rebuilding, but dry weather has prevented it.
The number of beef cows totaled 33.5 million head while dairy cows were reported at nine million head. Each category is down 100 thousand head from a year ago. Beef cow numbers peaked cyclically in 1995 at 36.1 million head, so beef cow numbers have declined by 2.6 million during this liquidation phase.
The first indication that herd rebuilding may have started is the fact that heifers, kept for beef cow replacements, are up 4.3 percent over last year. The 4.8 million head of beef replacement heifers is 200,000 above 2003, 2002, and 2001. Itís the highest since the same number was retained in 1999. However, the number of heifers is still about one million head less than the approximately 5.8 million head of beef replacements that were kept annually in the early 1990s, when the last cyclical herd rebuilding was in full swing.
This is the first time that beef heifers have showed an annual increase since 1994. Heifers are being retained in the Southern Plains and Southern Appalachian states including: Nebraska, Kansas, Oklahoma, Missouri, Tennessee and Kentucky. Moisture conditions in those states have returned to normal.
Beef herd liquidation is still occurring in parts of North and South Dakota, Wyoming and Montana, where drought conditions continue to persist.
Actual numbers for North Dakota and several other states were not available because USDA only reported information for 11 states. For example, beef cow numbers increased eight percent in Missouri, where adequate rainfall has occurred, but declined 13 percent in Colorado, where drought has been especially severe until last month.
There are other early signs that cyclical herd rebuilding has started. Cow slaughter for the first-half of 2004 was down 15 percent from last year and the number of heifers on feed declined almost two percent compared to the last two years.
Furthermore, replacement quality heifers received $5 to $10 per hundredweight premiums at livestock auction sales last spring.
The calf crop for 2004 was estimated at 37.7 million head, down about 200,000, or one percent from a year ago. The calf crop will be over 2.5 million head less than in 1995, the last cyclical peak calf crop, which is the lowest calf crop since 1951.
The calculated feeder cattle supply outside of feedlots was down about 240,000 head from last year. Historically low feeder cattle supplies means there will be excess feedlot capacity, which will be supportive to feeder cattle prices in the next six months.
The demand for feeder cattle, or what feedlots will be willing to pay, will depend on corn prices and the price of fed cattle.
December corn futures prices have dropped about 90 cents per bushel in the last two months with good corn-belt weather conditions and a record corn crop predicted by USDA. The rule of thumb is that each 10 cent per bushel change in corn prices causes a $1 per hundredweight change in feeder calves in the opposite direction. Those conditions have added support to prices this summer.
If current fundamentals continue, feeder cattle prices should remain strong for the next month with some normal seasonal weakness expected when the fall calve runs start hitting the market. The same grade and weight of calves, sold at the same time this year as last year, should average $5 to $10 per hundredweight higher.
Producers should keep in mind that relatively high price levels also means increased market volatility. News concerning BSE tests, potential problems with the corn crop, cattle and beef trade negotiations with other countries such as Canada and Japan and other national and international calamities can significantly affect the market.