2007 Beef Outlook: Cattle Cycle Will Continue, Prices Lower than 2006

By Sarah Watson, Livestock Editor
Wednesday, February 7, 2007 10:34 PM CST

Profitability in 2007 will depend on economically obtaining weight gain even with lower beef prices, domestic demand softening and higher corn prices, said Brenda Boetel, UW-Extension livestock marketing specialist at the Cattle Feeders Meeting in Janesville in January.

Looking back at 2006, beef domestic demand softened and that trend will continue into 2007.

"Retail demand had softened about 2.4 percent," she said. "Beef demand had been decreasing throughout the year. When you look at it from quarter to quarter to quarter, it was getting worse."

One reason domestic beef demand has decreased is the move away from the Atkins diet.

There was also a reduction in per capita spending from $238 in 2005 to $237 in 2006.

"The USDA forecasts are expecting a decrease in spending from about $4 to $5 per person in 2007," she said.

The 2006 cutout values were supported by higher rib and loin values and not by chuck and round like in 2005.

"Rib and loin values averaged 5 percent higher in 2006 than in 2005," she said. "Demand for higher quality beef has actually been increasing."

Foreign demand increased in 2006 by almost 80 percent relative to 2005. Boetel warns 80 percent sounds good, but demand had dropped dramatically in 2004 and has only begun to recover.

"Demand is no where near our previous export levels," she said. "But there're coming back."

Japan re-opened borders again in August 2006, but required age-verified cattle, less than 21 months of age at slaughter.

"It's been real slow getting the Japanese market back. Cattle have to be age verified," she said. "Even without that process it's going to be slow."

While Japan's borders were closed, they found alternative markets and aren't necessarily interested in switching back to U.S. beef right now. Boetel predicts it will take six to seven years before the Japanese are back at levels before they closed their borders.

Although retail demand went down, live fed cattle demand increased 3.9 percent through November 2006.

"Typically when retail demand is down, your fed cattle demand goes down," she said. "What we've seen is a trend that it's been weakening in December, so that's probably not going to be the case much longer."

Narrower retail margins have resulted in reducing hours, beginning in the late fall of 2006 and it has continued into 2007.

"Their margins began decreasing and that's why we saw them reducing hours. Now they're currently reducing hours this month because the fact of supply, but before they were doing it because of those margins," she explained.

On the supply side, cattle inventory continued to increase in 2006.

"Pre-estimations are that it is still increasing," she said. "We're still in the increasing phase of the cattle cycle."

Cow slaughter in 2006 was up 11 percent and beef cow slaughter was up 18 percent.

"Commercial red meat production was up 4 percent and our accumulative beef production was up 6 percent," she said. "So when supply starts going up and demand starts going down that's where our retail prices are going to start to go down."

"Cattle feeders in 2006 saw red," she said. "Most on average in the nation they were seeing red."

Despite drought, higher production costs and lower prices, cow-calf operations managed well.

Looking to demand in 2007, domestic demand will continue to soften, and per capita spending will decrease.

"There's a lot of alternative inexpensive protein products out there," she said. "There's a lot of pork in the market. There's a lot of poultry out there and those are actually still expected to increase in 2007."

"Beef and pork and poultry all compete with each other, and if pork prices go down, beef prices get pulled with it. If poultry prices go down the prices get pulled along," she explained.

Looking internationally, exports will continue to grow.

"Exports are projected to grow about 25 percent this year," she said. "Most of those are going to be coming from smaller countries."

Feed costs for 2007 will all increase because of drought and demand increases of corn.

"Alfalfa prices are up 10 percent, hay prices are up 21 percent, corn prices are up 77 percent from the previous year," she said.

Supply for 2007 will be affected by the corn price and cow-calf producers will be hit the hardest with lower feeder calf prices.

Overall profitability of the cow-calf producers will decrease, with profit margins declining by $75 to $80 per head.

"Some estimates out there say it could be as much as $95 per head," she said.

The calf market is expected to decline by $13 to $15 per hundredweight and average calf prices for a 550 pound steer will average between $110-112.

"Cattle feeders may end up placing fewer lightweight cattle on feed," she predicted. They tend to on average finish at lower weights."

Feeder cattle will continue opposite the trend of corn, and feeding margins are expected to be negative because of the higher cost of feed and lower fed cattle prices.

Average feeder prices could decline by $10 to $13 per hundredweight with averages in the high $90's per hundredweight.

The largest supply of feeder cattle is expected in the first and fourth quarter.

Cattle slaughter is projected to increase 2 percent in 2007, while carcass weights remain flat at 2006 levels.

Breakeven prices are going to remain volatile with the corn market.

When looking at a 750 pound steer placed on feed in mid-January (feeder price of $101) has a breakeven point of $90.07 per hundredweight in late June, if the steer has average feed efficiency and the corn price is at $3.75 per bushel and hay at $85 per ton resulting with a total cost of gain at $74.37.

If the corn price increases to $4.00, the cost of gain goes to $76.93 per hundredweight with a breakeven at $91.10 per hundredweight.

There is a $1 change in hundredweight per $0.25 per bushel corn price change.

In 2007 producers should continue to monitor beef exports and cattle weights including cull cows.

"If we don't get the decline in cull cows, then cattle weights will increase," she said.

Producers will also need to observe ethanol plant constructions, pasture conditions and feed prices.

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