1 Cattle Outlook & Risk Management Using BeefBasis.com James Mintert, Ph.D. Professor & Extension State Leader Department of Agricultural Economics Kansas

Cattle Outlook &Cattle Outlook & Risk Management Using BeefBasis.com Risk Management Using BeefBasis.com

James Mintert, Ph.D.James Mintert, Ph.D.Professor & Extension State Leader Professor & Extension State Leader

Department of Agricultural EconomicsDepartment of Agricultural EconomicsKansas State UniversityKansas State University

Garden City, KSGarden City, KSOctober 3, 2007October 3, 2007

www.agmanager.info/livestock/marketingwww.agmanager.info/livestock/marketing

[email protected]@ksu.edu

A Picture of A Healthy IndustryA Picture of A Healthy Industry

U.S. Cattle InventoryJ anuary 1, 1925-1975

50

6070

8090

100110

120130

140

25 30 35 40 45 50 55 60 65 70 75Year

Million

Head

Source: USDA & K-State Research & ExtensionKSU Dept. of Ag Econwww.agmanager.info

U.S. Cattle InventoryJ anuary 1, 1975-2007

50

60

70

80

90

100

110

120

130

140

75 80 85 90 95 00 05Year

Million

Head

Source: USDA & K-State Research & ExtensionKSU Dept. of Ag Econwww.agmanager.info

A Shrinking IndustryA Shrinking IndustryResponding to a Lack of Profitability Responding to a Lack of Profitability

Current inventory is about 26% Current inventory is about 26% smaller than in 1975smaller than in 1975

But Weaker Demand Was Key But Weaker Demand Was Key Beef Demand 1980-1998Beef Demand 1980-1998

Annual Retail Choice Beef Demand Index

88 86 8379 76

70 6966 65 62 59 58 56 55 53 51

94

50

0

10

20

30

40

50

60

70

80

90

100

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98Year

Ind

ex V

alu

e

Source: USDA, Dept. of Commerce & K- State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index

KSU Dept. of Ag. Econ. www.agmanager.info

Downturn Got Underway in mid-2005Downturn Got Underway in mid-2005Rebound In Spring 2007?Rebound In Spring 2007?

Beef Demand ShiftersBeef Demand ShiftersWhat’s been taking place recently?What’s been taking place recently?

Demand index does not indicate why shifts occurDemand index does not indicate why shifts occur

• Possible reasons for recent downturnPossible reasons for recent downturn

– Low carb diet effect has worn offLow carb diet effect has worn off

– Consumer’s disposable income growth slowingConsumer’s disposable income growth slowing

• Domestic demand could remain softDomestic demand could remain soft

• How do we turn this around?How do we turn this around?

International Trade Outlook International Trade Outlook

U.S. Was A Net Exporter From 1981-2003U.S. Was A Net Exporter From 1981-2003

Top 5 Importers Top 5 Importers Accounted for 91% of U.S. ExportsAccounted for 91% of U.S. Exports

Top 10 Importers of U.S. BeefRanked by Value of Imports in 2003

Other Category Consists of All Other Destinations

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

Japan Mexico S. Korea Canada HongKong

Taiwan Russia China Kuwait Egypt Other

Destination

Va

lue

(T

ho

us

an

d $

)

.

.

Source: USDA-FAS .

U.S. needs to U.S. needs to recapture these recapture these markets to regain markets to regain $’s and volume$’s and volume

Gains In Japan Have Been SmallGains In Japan Have Been Small

Japan's Share of U.S. Beef Exports .

0%

10%

20%

30%

40%

50%

60%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Year

Ma

rke

t S

ha

re (

%)

.

Source: USDA & KSU, Measured On A Carcass Weight Basis .

Jan-July ‘07 Was Still 84% Below Jan-July ‘03

Where Are We Headed?Where Are We Headed?TradeTrade

• U.S. strength is in high quality beef productsU.S. strength is in high quality beef products

– Will higher corn prices erode this advantage?Will higher corn prices erode this advantage?

• Regaining market share will take several yearsRegaining market share will take several years

– Market access is keyMarket access is key

– Korea & JapanKorea & Japan

• Consumer incomes in importing countries are key Consumer incomes in importing countries are key to long-run growth in beef exportsto long-run growth in beef exports

• Other countries may have comparative advantage Other countries may have comparative advantage in cow-calf productionin cow-calf production

Supply Side in the U.S. Supply Side in the U.S.

Strong Profitability Encouraging Expansion, But…Strong Profitability Encouraging Expansion, But…

Drought Conditions Discouraged Expansion in ’06Drought Conditions Discouraged Expansion in ’06

And Expansion Still Appears To Be On Hold…And Expansion Still Appears To Be On Hold…January-mid-Sept. Beef Cow Slaughter Up 7% vs. 2006 January-mid-Sept. Beef Cow Slaughter Up 7% vs. 2006

35

40

45

50

55

60

65

70

75

01/06 02/24 04/14 06/02 07/21 09/08 10/27 12/15

Th

ou

san

d H

ead

Week Ending

Weekly F.I . Beef Cow Slaughter

2006 2007 5 Yr Avg

Source: USDA & J ames Mintert, K-State Ag. EconomicsKSU Dept. of Ag Econwww.agmanager.info

GREAT PLAINS REGIONRANGE AND PASTURE CONDITION

Percent Poor and Very Poor, Weekly

0

10

20

30

40

50

60

70

May Jul Sep

Percent

Avg.2001-052006

2007

Data Source: USDA/NASS, LMIC

Plains Pastures Are Much Better Than In ‘06Plains Pastures Are Much Better Than In ‘06

US RANGE AND PASTURE CONDITIONPercent Poor and Very Poor, Weekly

0

10

20

30

40

50

60

May Jul Sep

Percent

Avg.2001-052006

2007

Source: USDA/NASS & LMIC

But U.S. Conditions Still Worse Than AverageBut U.S. Conditions Still Worse Than Average

31323334353637383940414243

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Million

Head

Annual U.S. Commercial Cattle Slaughter

Year

Source: USDA & J ames Mintert, K-State Ag. EconomicsLMIC Forecasts for 2007-2008

Modest Slaughter Decline Expected in ‘08Modest Slaughter Decline Expected in ‘08

Excess slaughter capacity means spread between live and wholesale prices will remain tight

Narrow Processor Margins Are Narrow Processor Margins Are Supporting Slaughter Cattle PricesSupporting Slaughter Cattle Prices

On Feed Inventory Below A Year AgoOn Feed Inventory Below A Year Ago

9.50

9.75

10.00

10.25

10.50

10.75

11.00

11.25

11.50

11.75

12.00

12.25

J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec

Million

Head

.

Month

U.S. Cattle On Feed Lots Over 1000 Head

2007

2006

5 Yr. Avg.


Placements Down Sharply This Summer Placements Down Sharply This Summer

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec

Million

Head

.

Month

U.S. Net PlacementsLots Over 1000 Head

2007

2006

5 Yr. Avg.


Changing Composition of Placements On Feed Changing Composition of Placements On Feed

U.S. Placements of Cattle On Feed, By WeightMay 2007 - August 2007 vs. May 2006 - August 2006

% Change # Head Change Weight Group From Prior Year From Prior YearLess Than 600 Lbs. -32.8% (580,000) 600-699 Lbs. -12.9% (182,000) 700-800 Lbs. 6.0% 117,000 800-900 Lbs. 4.8% 105,000 Less Than 700 Lbs. -24.0% (762,000) Over 700 Lbs. 5.4% 222,000 Total -7.4% (540,000)

Weather’s Impact On Performance Weather’s Impact On Performance Held Weights Down Until RecentlyHeld Weights Down Until Recently

730

740

750

760

770

780

790

800

01/06 02/24 04/14 06/02 07/21 09/08 10/27 12/15

Pou

nd

s

.

Week Ending

Weekly F.I . Cattle Dressed Weight

2006

2007

5 Yr Avg


Long Term Trend Is Still Toward Higher WeightsLong Term Trend Is Still Toward Higher Weights

570

590

610

630

650

670

690

710

730

750

770

790

70 75 80 85 90 95 00 05

Dre

ssed

Wt.

/H

ead

(Lb

s.)

.

Year

Commercial Cattle Carcass Weights .

Trend (1986-

K-State Dept. of Ag Econwww.agmanager.infoSource: USDA & J ames Mintert, K-State Ag. Economics

Weights Expected To Be Above Year Earlier This Fall & WinterWeights Expected To Be Above Year Earlier This Fall & Winter

Little Change in Beef Production Expected in ‘08Little Change in Beef Production Expected in ‘08

20

21

22

23

24

25

26

27

28

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Bill

ion

Pou

nd

s

Year

Commercial Beef Production

KSU Dept. of Ag Econwww.agmanager.info

Source: USDA & J ames Mintert, K-State Ag. EconomicsLMIC Forecasts for 2007-2008

Prices Have Rallied…Prices Have Rallied…

75

80

85

90

95

100

105

01/05 02/16 03/30 05/11 06/22 08/03 09/14 10/26 12/07

Pri

ce (

$/c

wt.

)

Week Ending Date

Kansas Direct Slaughter SteersWeekly Weighted Average Live Weight Prices

2006

2007

5 Yr Avg


Record High Prices in ’07 & Again in ‘08Record High Prices in ’07 & Again in ‘08

Futures Forecast Prices Futures Forecast Prices Over $100 in Late Winter & Early SpringOver $100 in Late Winter & Early Spring

88

90

92

94

96

98

100

102

104

106

Oct. '07

Nov. '07

Dec. '07

J an. '08

Feb. '08

Mar. '08

Apr. '08

May '08

J un. '08

J ul. '08

Aug. '08

Sep '08

Oct '08

Nov '08

Dec '08

Pri

ce (

$/c

wt.

)

Month & Year

Mid-Month Futures Based Price Forecasts Kansas Slaughter Steers

3 Yr. Avg. Basis Most Neg. Basis Most Pos. Basis


Source: USDA & James Mintert, K-State Ag. EconomicsBased on 10.01.07 CME Live Cattle settlement prices

Feeders Climbing Back Near $120Feeders Climbing Back Near $120

85

90

95

100

105

110

115

120

125

01/05 02/16 03/30 05/11 06/22 08/03 09/14 10/26 12/07

Pri

ce (

$/c

wt.

)

Week Ending Date

Kansas Combined Auction (Dodge City, Pratt, Salina) Weekly Weighted Average 700-800 Lb. Steer Prices

2006

2007

5 Yr Avg


Strong Fed Cattle Prices Supporting Feeder ValuesStrong Fed Cattle Prices Supporting Feeder ValuesFeed Grain Prices Will Be KeyFeed Grain Prices Will Be Key

But Feeder Futures But Feeder Futures Forecast Weaker Prices This WinterForecast Weaker Prices This Winter

107

109

111

113

115

117

119

121

123

125

Oct. '07 Nov. '07

Dec. '07

Jan. '08 Feb. '08 Mar. '08

April '08

May '08 Jun. '08 Jul. '08 Aug. '08

Sep. '08

Pri

ce (

$/c

wt.

)

Month & Year

Mid-Month Futures Based Price Forecasts700-800 Lb. Feeder Steers, Dodge City, KS

3 Yr. Avg. Basis Most Neg. Basis Most Pos. Basis

Source: CME & K-State Research & ExtensionForecasts =10/01/07 Futures Price + Basis Estimates


Calf Prices Rebounded Sharply This SummerCalf Prices Rebounded Sharply This Summer

95

100

105

110

115

120

125

130

135

140

145

01/06 02/17 03/31 05/12 06/23 08/04 09/15 10/27 12/08

Pri

ce (

$/c

wt.

)

Week Ending Date

Kansas Combined Auction (Dodge City, Pratt, & Salina) Weekly Weighted Average 500-600 Lb. Steer Prices

2006 2007 5 Yr Avg


Feed Costs Will Be A Big Factor in Calf Price OutlookFeed Costs Will Be A Big Factor in Calf Price OutlookCycle Peak was in ’05Cycle Peak was in ’05

Ethanol, Corn Prices, & Cattle Ethanol, Corn Prices, & Cattle

Implications for Cattle Feeding IndustryImplications for Cattle Feeding Industry

Where Will Future Expansion Take Place?Where Will Future Expansion Take Place?

A Growing IndustryA Growing Industry

Kansas Cattle On Feed Monthly, 1992-2005

1500

1750

2000

2250

2500

2750

1992 1994 1996 1998 2000 2002 2004

Year

Th

ou

san

d H

ead

Source: USDA & K-State Ag. Economics

Southern Plains Feeders Southern Plains Feeders Losing Market Share?Losing Market Share?

49%

50%

51%

52%

53%

54%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Perc

en

ct o

f U

.S.

Tota

l

Year

KS, OK, TX Placements of Cattle On Feed% of U.S. Placements, Prior October thru J une of Current Year

Source: USDA, Cattle On Feed & J ames Mintert, K-State Dept. of Ag. Economics

Cattle Feeding Shifting North?Cattle Feeding Shifting North?

22%

23%

24%

25%

26%

27%

28%

29%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Perc

en

ct o

f U

.S.

Tota

l

Year

NE, IA, SD Placements of Cattle On Feed% of U.S. Placements, Prior October thru J une of Current Year

Source: USDA, Cattle On Feed & J ames Mintert, K-State Dept. of Ag. Economics

Key PointsKey Points• Strong slaughter cattle prices ahead in ’07 & ’08Strong slaughter cattle prices ahead in ’07 & ’08

– Herd expansion in U.S. cut shortHerd expansion in U.S. cut short

– Slow export market recoverySlow export market recovery

– Domestic demand could be weakDomestic demand could be weak

• High feed grain prices are the “new reality”High feed grain prices are the “new reality”

– High corn price volatility is also the new realityHigh corn price volatility is also the new reality

• Feeder & calf prices supported by high fed cattle Feeder & calf prices supported by high fed cattle pricesprices– would be even higher with lower feed costswould be even higher with lower feed costs

• Upper Midwest DGS concentration will encourage Upper Midwest DGS concentration will encourage feeding expansion in the Northfeeding expansion in the North

Improved Feeder Cattle Basis ForecastsImproved Feeder Cattle Basis Forecasts

Forecasts From Two Different Models ProvidedForecasts From Two Different Models Provided750 Lb. Steer Basis Forecasts, Amarillo, TX750 Lb. Steer Basis Forecasts, Amarillo, TX

Forecasts For: 10.31.2007Forecasts For: 10.31.2007

Sensitivity Analysis ProvidedSensitivity Analysis ProvidedImpact of Changes in Corn & Live Cattle Prices on BasisImpact of Changes in Corn & Live Cattle Prices on Basis

750 Lb. Steer Basis Forecast for 10.31.2007, Amarillo, TX750 Lb. Steer Basis Forecast for 10.31.2007, Amarillo, TX

Need A Forecast For A Different Weight?Need A Forecast For A Different Weight?Go Back To The Input Screen & Change It Go Back To The Input Screen & Change It

Other Tools Available on BeefBasis.comOther Tools Available on BeefBasis.comExamine & Download Historical Market Data Examine & Download Historical Market Data

Make Comparisons Between 2 or More MarketsMake Comparisons Between 2 or More MarketsExample: OKC vs. Pratt, KSExample: OKC vs. Pratt, KS

Compare Average Price By Month, Year-By-YearCompare Average Price By Month, Year-By-YearOKCOKC Medium & Large, #1 700-750 Lb. SteersMedium & Large, #1 700-750 Lb. Steers

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www.agmanager.infowww.agmanager.info

www.beefbasis.comwww.beefbasis.com

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Documents

1 Cattle Outlook & Risk Management Using BeefBasis.com James Mintert, Ph.D. Professor & Extension State Leader Department of Agricultural Economics Kansas