Cattle Demand Strengthens

US - By Brian Roe, Associate Professor AED Economics, Ohio State University, April 2007. Despite the wintry weather experienced out west during the early parts of 2007, February beef production was up 7% compared to the previous year with a 9% increase in the number of cattle slaughtered being tempered by a 2% decline in dressed weights.
calendar icon 5 April 2007
clock icon 3 minute read
Brian Roe
Brian Roe
Associate Professor
Ohio State University
Despite the surge in production, average prices were only about 40 cents lower than February 2006, suggesting that demand for live cattle strengthened during the month of February. Had demand been equal to that of 2006, average cattle prices would have sold in the upper $70’s rather than the upper $80’s as they did during February. In other words, stronger demand meant about $9 per hundred more for fat cattle in February 2007 than February 2006.

Will this demand strength carry forward through April and June? So far, it looks that way. In April of 2006, prices averaged only about $81 on very heavy sales volume. Compare that to recent April futures contracts, which are trading around $99. If cattle demand this April were to match last April’s demand, it would take a 10% decline in dressed beef during April to explain that $99 futures price. Since a 10% decline isn’t likely in the cards – a 3 or 4 % decline is more likely – it suggests the futures market price includes an $11-12 dollar demand premium over last year. That’s $2-3 more than the bump we saw in February, i.e., the futures market is building in even greater demand strength than was observed in February.

The Cattle on Feed report also suggests that the number of cattle coming to market during May and June will be smaller than last year due to fewer placements of lightweight cattle onto feedlots late last fall and due to fewer placements of heavier feeder cattle on feedlots during the snowstorms of January. Recently, June futures contracts were trading at $96.40. If demand were merely as strong as last year’s June demand, beef production would have to be about 8% lower than last year to justify such a futures price. A 3% reduction in beef supply might be more likely in June. This suggests that the $96.40 futures price is predicting a June cattle demand that is about $10 stronger than last year’s June demand, which is in line with February and April improved cattle demand figures.

In Eastern Corn Belt feeder cattle markets, the 30 cent decline in cash corn prices during March has not immediately spilled over to higher cattle prices – light weight feeder prices were flat during March while heavier weight feeders gained a few dollars. Furthermore, the decline in corn prices has not been enough to allow the price slide between the lightest and heaviest feeders to expand as it has during the past few years. That is, during 2005 and 2006, the per pound price difference between 300 pound and 800 pound feeder cattle has usually increased from the upper- $20’s during January and February to the $40’s by March and April. This year that price difference between weight groups is still in the $30’s, meaning that the decrease in corn price is not large enough to allow buyers to confidently buy lighter weight feeders that will consume so much corn in the months to come.

The decrease in corn price has made dried distillers grains less attractive, however. During late February, the substitution of one ton of dried distillers grains for 26.1 bushels of corn and 420 pounds of soybean meal would provide a savings of about $15-20. By late March the cost advantage of such a switch declined to about $5. The question becomes – will the increase in ethanol production eventually start to drive the price of distillers grains lower on a more permanent basis?

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