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What Goes Up Will Come Down ...

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It may be the understatement of the century to say that cattle markets have been unprecedented. Cattle prices rose to giddy heights during September and the first half of October. Prices weakened late in October but have rebounded and remain at never before thought of levels the first week of November. Fed cattle at the $105 level and 750 pound feeders at a dollar or two above that are prices that were not in even the wildest dreams a few months ago! Will these price levels last? How long?

Cattle prices will come down. To determine when and how much requires some understanding of why or how they reached current levels. A combination of factors, some never seen before and some not seen for about thirty years, have led to the current situation in the beef cattle markets. The ban on all Canadian beef exports removed about 9% of U.S. slaughter cattle supplies. This came at a time when U.S. slaughter cattle supplies were already 'tight' due to the continued cyclical reduction in cattle numbers. Add to this the continued strong demand for beef which is up 2% to 3% over 2002 for the first nine months of 2003. The cattle industry has not experienced reduced supplies due to heifer retention to rebuild herds and increasing beef demand occurring together since the early 1970s. Most analysts have been predicting for the last few years that we would see record high cattle prices as we moved toward holding heifers to rebuild the cow herd. The BSE situation in Canada added the never before seen factor that accelerated and increased the supply-demand imbalance anticipated to come from herd rebuilding. The combined effect of these events is the almost unbelievable prices for feeder cattle, fed cattle and boxed beef prices.

The concept of elasticity of demand and the assumption that demand elasticity at the farm level is -0.5 means that if the Canadian ban decreased supplies 9% then price should have increased 18%. From price levels for slaughter cattle when the ban went into effect prices would have risen only into the $90's, not the $100's. There is always an emotional factor in rapidly moving markets. In addition, the beef industry now operates with a fair amount of contracts and packers were forced to obtain supply to fulfill previous commitments. Even stronger demand is not a factor in the peak prices observed because the true cost of beef has yet (as of early November) to be reflected in retail and restaurant prices. The real test of the strength of beef demand should occur in the next several weeks as wholesalers, retailers and restaurateurs are forced to quit absorbing higher prices and consumers are faced with current prices. There is talk of 40 % to 50% increases in retail beef prices.

Intermediate term the wild card is the Canadian situation. As of this writing, there is an announced USDA 60-day comment period on a new policy that would start reopening of the border. It will be well into 2004 before this process can be completed. The 2004 June and August fed cattle futures are currently predicting $74 to $76 fed cattle prices. This, hopefully, is a little low but remember that the same elasticity of demand will work in reverse when additional slaughter cattle come in from Canada. Summer prices for fed cattle will be closer to $80 than to $100.

Longer term, herd rebuilding has not started. In fact, the exceedingly high prices of this fall may actually further postpone heifer retention. Many prices reported for short bred heifers are not appreciably higher than feeder heifers. And a heifer calf saved back this fall has a very high opportunity cost. Increased supplies through herd rebuilding are simply not biologically possible until at least 2006 and perhaps not financially feasible until later. This means the potential for very good calf prices now extends out to 2007 or 2008.

If you, like most, are confounded by the decisions to be made regarding the future direction of both the numbers and genetic makeup of your cow herd, contact both the livestock and economics specialists at the Noble Research Institute for assistance in objectively evaluating the alternatives.

Thought for the month We are what we repeatedly do. Excellence, then, is not an act, but a habit.