Optimistic and enthusiastic are the words that best describe America's beef industry as the 1990s draw to a close. Beef demand has turned upward, showing signs of reversing a 20-year decline, and cash cattle prices have moved significantly higher the past six months. Those two factors make beef producers optimistic for the coming year. But an assortment of new beef products coupled with positive messages about beef's nutritional benefits has made producers enthusiastic about opportunities for the coming years.

"Consumer demand for beef increased 3.3 percent in the first six months of 1999, and demand has looked stronger since then," says University of Missouri economist Ron Plain. "If we can continue the upward trend in prices, the cattle business is going to be a lot more fun in the next 10 years than it has been for the last 10 years."

Market analysts expect the next few years to be a lot more fun for cow-calf producers. Cattle-Fax market analyst Randy Blach says most cow-calf operations will see good profits the next three years and "make some good money for the first time since the early 1990s."

Beef demand

The biggest story for beef producers the past year was increasing consumer demand. Beef prices were strong in the second half of last year despite record beef production and large supplies of competing meats. Two key factors contributing to demand gains in 1999 include increased consumer spending for beef and gains in per capita consumption. Consumer spending on beef during 1999 was projected to reach $48.56 billion, which is nearly $2 billion above the 1998 level. And per capita spending for beef was expected to grow to $178 during 1999, a $5 per capita increase.

One reason for the increase in total beef spending in 1999 was the fact consumers were buying beef at steady to slightly higher prices despite record-high beef supplies. Total beef supplies for 1999 were expected to reach nearly 27 billion pounds, yet the U.S. Department of Agriculture's average retail beef prices were up 4 cents per pound over the previous year.

"Demand has been a positive influence on our industry," Mr. Blach says. "It's hard to know just how much of the demand growth the industry will sustain. Our forecast suggests we'll keep about two-thirds of the growth in demand we saw in 1999."

Increased exports during 1999 also contributed to improving beef demand. "Beef exports posted a 9 to 10 percent gain over 1998 figures," says John Nalivka, Sterling Marketing, Inc. Vale, Ore. "At the same time, beef imports posted a 6 percent increase. Net trade in beef, while improved from 1998, is still in favor of product coming into the U.S."
Demand also was spurred by the robust general economy, highlighted by steady growth, rising wages, low inflation and a low unemployment rate.

Cow-calf outlook

Rising cattle prices during the second half of 1999 turned most cow-calf and feedyard operations profitable. Tighter supplies of feeder cattle and reductions in the total beef supply should help producers maintain profitability throughout 2000. Analysts expect beef production to be down 3 percent to 5 percent during 2000, taking total production down to below 25.5 billion pounds.

"This will be the first year to show a decrease in beef production since 1993 and will put consumption near 68 pounds on a retail weight basis," says Jim Gill, market director for Texas Cattle Feeders Association. He says average carcass weights are expected to be lower than the record 736 pounds in 1999, dropping to a more normal 700 pounds to 705 pounds.

Cow-calf producers are entering a period of profitability that should last three years and maybe longer. Mr. Nalivka projects average cow-calf operations saw profits of nearly $30 per cow during 1999, and the next two years should produce profits near $60 per cow. He also projects profits to continue during 2002 and 2003, though at a lower level (see chart).

Improved cow-calf profitability is the result of tightening feeder cattle and calf supplies caused by declines in the total cattle inventory. The U.S. Department of Agriculture's July Cattle Inventory report pegged the 1999 calf crop at 38.3 million head, down 2 million head from the 1995 high of 40.3 million head. It marked the fourth consecutive year of a decreased calf crop. Cattle-Fax estimates that the supply of feeder cattle and calves outside feedyards on Jan. 1 was nearly 1.5 million head smaller than last year at 29.45 million head. That total would be 4.5 percent smaller than a year earlier and 11 percent smaller that the peak supplies in 1996. Cattle-Fax expects available supplies will tighten into 2001 and then stabilize in 2002.

Analysts project prices for 750- to 800-pound feeder steers to average $80 to $83 per hundredweight during 2000, with peak prices reaching $85 or better. Prices for steer calves weighing 500 pounds are projected to average $90 to $100 per hundredweight, with peak prices reaching $105 or better.

Profits on fed cattle averaged about $45 per head during 1999 but will likely decline during the first quarter of 2000 due to higher breakevens. Margins on fed cattle should continue to tighten throughout the year, leaving average profits for the year of about $18 per head, according to Sterling Marketing.

Fed cattle prices are projected to average $67 to $71 per hundredweight during the first quarter of 2000 and $68 to $74 per hundredweight the remainder of the year.

Trends and opportunities

Cattle producers in all segments should use improving profit margins over the next couple of years to recover equity lost during the past few years. For cow-calf producers, maximizing numbers and production should be a priority during this period of the cattle cycle.

"Managing cull cows will pay extra dividends," says Cattle-Fax's Mr. Blach. "Slaughter-cow prices will bring a higher percentage of the fed-cattle market than any time the last five years. Look for slaughter cow prices to trend higher and follow strong market seasonals."

For cattle feeders, the biggest risk during the next two to three years will be the cost of replacement cattle. The industry should see the widest feeder-cattle and fed-cattle price spreads in history the next few years (see chart). Feeder-cattle prices may average 117 percent to 119 percent the price of fed cattle, which will lead to narrowing profit margins for cattle feeders. Analysts suggest feedyards use a more aggressive approach to buying feeder cattle ahead of expected needs.

"Cattle feeders and feedlots need to plan ahead for significantly smaller available supplies," Mr. Blach says. "Buying lightweight cattle and owning the cattle for a longer period of time may be a viable option."

In general, the outlook for cattle producers is positive for the next two to four years. This period of profitability should be used to strengthen your financial position and prepare for the next cyclical downturn, which is likely to occur by the middle of the decade.