Cattle prices pushed higher during the final weeks of 2000, but the story of the decade for beef producers was the continued strength in beef demand. Research confirms that for nearly two years beef demand has increased steadily after a 20-year decline. And consumers are buying beef at higher prices despite record-large beef supplies. Strengthening demand, coupled with tight supplies of all cattle during 2001, will provide good-to-excellent profit opportunities for every producer segment.
Preliminary Beef Demand Index figures show that demand increased 6.17 percent during the third quarter of 2000, as compared with the third quarter of 1999. The strength of consumer demand is evident in retail beef prices, which averaged a record $3.06 per pound during 2000. Since 1998, choice retail beef prices have increased more than 10 percent. The rally in retail prices has occurred during a period of peak beef production as estimates placed 2000 beef production at a record 26.8 billion pounds. That's 3.8 billion pounds larger than 1993 production, the previous cycle-peak.
Analysts believe growth in beef demand has been the primary driver for increased prices the past two years. According to Cattle-Fax, beef demand increases the past two years has added nearly $11 per hundredweight to the value of fed cattle and about $15 to $20 per hundredweight to the value of feeder cattle and calves, respectively. Cattle-Fax expects demand growth in 2001 to slow but still show a slight increase over 2000.
Choice retail beef prices are expected to average slightly higher again next year at about $3.12 per pound. Consumer expenditures for beef were estimated to be record-large in 2000 and will be nearly the same in 2001, as the decline in per-capita consumption will be offset by the increase in retail prices. Beef production is expected to decline to a range of 26.0 to 26.4 billion pounds this year, down 2 percent to 3 percent.
"This will be the first decrease in beef production since 1993 and will put annual per-capita beef consumption around 66.5 pounds on a retail weight basis," says Jim Gill, market director for the Texas Cattle Feeders Association, Amarillo, Texas. Mr. Gill says the drop in beef production will stem mainly from the expectation that average carcass weights will fall back from the record 745 pounds recorded in 2000.
"We placed a lot of light-weight calves the last half of 2000, and especially the final three months of the year. Lighter-weight calves produce lighter-weight finished cattle which yield lighter-weight carcasses."
Beef will continue to find strong competition in the meat case as total meat supplies in 2001 will be about 1 percent larger than 2000, bringing the total to around 83 billion pounds. Mr. Gill expects pork production to increase 2.5 percent this year to about 19.4 billion pounds, while poultry supplies will increase more than 3 percent to near 37 billion pounds.
Cow-calf producers enjoyed their best year in more than a decade last year, and next year promises to be just as good. John Nalivka, Sterling Marketing Inc., Vale, Ore., says cow-calf operations saw average profits of $107.81 per cow during 2000, and he projects 2001 profits to again top the $100 per cow mark. That compares with 1999 profits of $50.80 per cow, and average 1998 profits of $2.90 per cow. Strong prices for feeder cattle and calves are the driving forces behind ranch prosperity, and tight supplies of cattle coupled with strong consumer demand for beef products should support the market in 2001 and beyond.
According to data collected in Drovers' 50-market auction summary, stocker and feeder cattle prices averaged 13 percent to 17 percent higher in 2000 than during 1999. Steer calves, 400 to 500 pounds, averaged $104.44 per hundredweight, which compares with the 1999 average of an even $90 per hundredweight, an increase of 14 percent. Prices for that class of steers were up 19 percent over the 1998 annual average of $84.80.
Feeder steers weighing 600 to 700 pounds averaged $88.20 per hundredweight last year in the Drovers' auction summary, an increase of 13 percent over 1999's average of $76.63. The 2000 average was 17 percent higher than the 1998 average of $73.20.
Mr. Nalivka projects 2001 steer calf prices to average $116 per hundredweight, with heifer calves at about $106 per hundredweight. His 2002 projections are similar, with 2003 projections falling to $102 per hundredweight for steer calves and $92 per hundredweight for heifer calves.
Such price projections create similar results for cow-calf profitability projections for 2002 and 2003. Mr. Nalivka suggests cow-calf profits will be about $96 per cow in 2002, and fall to about $73 per cow in 2003. For comparison, average cow-calf profits have not reached the $100 per cow mark since 1989, and haven't reached the $70 per cow level since 1991.
Low cost, high return producers will be highly profitable over the next three to four years. Analysts suggest that you hold production costs down without sacrificing production and performance. Cow-calf producers are encouraged to maximize numbers and production during this profitable period.
Trends and opportunities
The bright outlook for 2001 is probably secure, unless corn prices increase dramatically or some unforeseeable event disrupts beef marketing and consumption. Excellent profitability may trigger cow herd expansion this year, which would mean even fewer cattle to feed and slaughter this year. Many analysts expect ranchers to start retaining heifers for breeding this year, and the first indications of that trend may be visible in the U.S. Department of Agriculture's Annual Cattle Inventory report (released Jan. 25, 2001).
Heifer development is also a good source of revenue for producers to consider in the coming years. Bred cow and heifer prices are expected to increase $50 to $100 per head in each of the next three years. Selling bred heifers may generate additional revenue for producers that have above average genetics.
For cattle feeders, the biggest risk during the next three years will be the cost of replacement cattle. The industry should see the widest feeder-cattle and fed-cattle price spreads in history. That will lead to narrowing profit margins for cattle feeders.
In general, however, the outlook for all producers is positive for the next two to four years. Cow-calf producers are encouraged to use this period of time to reduce debt and prepare for the next cyclical downturn which is likely to occur by the middle of the decade.