Our research division makes it a point not to comment on opinions or articles from other analysts. We even make it a point not to read anyone else. However, in recent days a widely read daily advisory paper, more noted for financial market information than agricultural markets, had some clearly error filled cattle information. The financial publication grouped beef into their analysis that livestock markets were tumbling due to liquidation. That is clearly not true in beef. Then they published a letter, reportedly from a large feedlot, with some more error filled information. Please, know your information source closely.
Here are the Facts: The cattle market is under liquidation. It is nothing new. It is not impacting prices bearishly. In fact, by second half of this year it will make a bullish long-term outlook come true. The recent term break in cattle prices is not due to any brand new liquidation at all. In the short term slaughter levels are moderate. The recent cattle price dip is attributed to last week's bad economic news. A Refresher on Cattle Liquidation: The cattle industry is liquidating. It is currently liquidating, and in fact has been, since 2006. From 1996 to 2004 the US cattle industry went on a longer than usual liquidation cycle. From 1996 to 2003 fall steer calf prices rebounded from $65 to $89. In 2003 we closed our border to Canadian cattle of all types due to Canada's finding BSE and US steer calves jumped to $109 in the fall. US cow/calf producers responded to the high prices with expansion in 2004 and 2005. Cow slaughter fell and young heifers were held back from the feedlot. That expansion stopped in 2006. In 2006 the top beef cow states in order of importance were Texas, Missouri, Oklahoma, Nebraska, South Dakota, and Kansas. Every single of one those states was hit by drought. In 2007 liquidation continued. We had carryover high hay prices from the 2006 hay crop. Also drought hit the southeast. Kentucky and Tennessee are number eight and nine in beef cow numbers respectively. In 2008 we will continue to liquidate and it is not directly from high grain costs. High grain costs mainly hit feeder cattle prices. Even with that hit these calf and feeder prices are still good enough for expansion. High grain prices are mainly hitting cow/calf producers indirectly. There is widespread talk of pastures being converted over to cropland this year. Fewer acres and higher priced hay will be the main reason cow/calf producers will continue their liquidation in 2008.
The liquidation in 2006, 2007, and 2008 means we will have progressively lower beef production in each of the next three years, barring some change in Canadian cattle imports or drought. A fresh heifer kept on farm in the fall will be bred at around one year old and give birth at two years old. That calf will be weaned in the fall and sent to the feedlot for finishing the following summer. From the decision to hold that heifer back to when beef production rebounds is at earliest two and a half years. There can be a bump in production earlier if beef cow slaughter falls quick enough but we are trying to make this simple. The point is there should be no surprise in any of this information, which we have covered before. It is this reason why we have no fat cattle hedges on past the summer of this year. Fat cattle prices will easily average $100 in 2009 and could average $110 by 2011.
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