Cattle Outlook

1. Cattle Outlook James Mintert, Ph.D. Professor & Extension Ag. Economist, Livestock Marketing Department of Agricultural Economics Kansas State University

2. Issues • Farm Policy • Seasonality in Steer Feeding • Cattle Cycle • Weights • Cattle On Feed & Placements • Trade • Demand

3. For Updated Livestock Marketing Information Visit The K-State Livestock & Meat Marketing Web Sitewww.agecon.ksu.edu/livestock

4. “This squall between the packers and the producers of this country ought to have blown over forty years ago, but we still have it on our hands…” Senator John B. Kendrick of Wyoming (1919)

5. Johnson Amendment • Unlawful for meatpackers to own, feed or control livestock for more than 14 days prior to slaughter. • Coops exempt • if a majority of the ownership in the coop is held by active members who own, feed or control livestock and provide them to the coop for slaughter. • Packers that slaughter less than 2% of annual slaughter of each type of livestock are exempt.

6. Control Controversy • Harkin-Grassley Amendment • Unlawful for packers to own or feed livestock directly through a subsidiary or through an arrangement that gives the packer operational, managerial or supervisory control over the livestock or over the farming operation that the producer is no longer materially participating in the management of the operation with respect to the production of the livestock

7. What Does It Mean? • Conflicting Legal Opinions • Tremendous uncertainty about what type of business arrangements would be legal • Some lawyers believe that virtually all strategic alliances and marketing agreements between packers and producers will be deemed illegal • Likely that “material participation” will be settled on a case by case basis

8. Packer Concentration Increased Dramatically Source: USDA & Sparks Co., Inc.

9. Concentration Driven By Cost Considerations • Historically, gross profit margins have been about the same for all major meat packers • Differences in profitability across firms was attributable to differences in costs • Low cost firms came out on top • Economies of size in slaughtering and fabrication were very large (Sersland, Duewer & Nelson; McDonald; Paul)

10. Vertical Integration Attractive To Investors Because Packer & Producer Profits Negatively Correlated Source: Sparks Co., Inc.

11. Same Story In Beef Except Correlation Is Not As Strong Source: Sparks Co., Inc.

13. 2001-2002 Isn’t The First Time Cattle Feeders Have Lost A Lot of Money

14. Late Spring & Summer Placements Tend To Be More Profitable & Carry Lower Risk

16. Seasonality of Prices & Performance Has A Big Impact On Profitability

18. Liquidation Has Been Underway for 6 Years

19. Resulting In Yet Another Herd Reduction Current inventory is about 27% smaller than in 1975

20. Average Cattle Cycle Is About 10 YearsBut Current Cycle Just Completed 13th Year

21. When Will Cow-Herd Expand?Forage Availability Will Be Critical

22. But A Smaller Herd Doesn’t Necessarily Mean Smaller Production

23. Heavier Carcass Weights Tell The Story

24. Weights Have Been A Big Problem In 2002But Have Declined More Than Usual Since January

25. Weight Increase Not Because of Feedlot Performance

26. Longer Feeding Periods Are The Problem

27. Negative Basis Structure Encouraged Feeding To Heavier Weights

29. But Basis Structure Has ChangedWill It Lead To Shorter Feeding Periods?

30. Will Weight Decline Extend Into May?

31. Cattle On Feed Below A Year Ago, But Still Large By Historical Standards

32. And Placements Rose During February

33. Placement Increase Focused On Heavy CattleWhich Will Be A Problem By Late Spring

34. Non-Fed Slaughter Below A Year AgoBut Beef Cow & Calf Slaughter Up In Late March

35. Small Placements Last Fall Pushed Slaughter Pace Below 2001 During March

36. But Heavy Weights Kept Production Pace Up

37. Long-Run Beef Export Growth Has Been Phenomenal

38. And The Gap Between Our Imports & Exports Has Narrowed Dramatically

39. Net Imports Up RecentlyBut Still Far Below Early 1990’s Source: LMIC

40. Weak Economies In Importing Countries & BSE In Japan Mean Exports Will Be Weak In 2002

41. January Exports Down 1.8%

42. Exports To Japan Down 33% vs. Prior Year From November Forward

43. Summary • 2002 annual beef imports up 1 to 3% • 2002 annual beef exports down 3 to 5% • Weights will continue to decline • but remain above last year through summer • U.S. beef production above 2001 until fall • Annual total near 2001 level

44. Best News In Beef Industry In 20 Years

45. Demand Showed Signs of Strengthening In 1999, 2000 & Again In 2001

46. Another Look At Demand Compute a demand index The index accounts for changes in beef quantity The index relates current beef prices to prices expected if demand was held constant at some prior year’s level

47. Domestic Retail Beef Demand Is Improving Retail Choice Beef Demand Increased 5.3% during 2002

48. Cyclical Peak In Slaughter Cattle Prices Still Ahead Annual Average Steer Prices . W. KS 11-13 Cwt. . 85 80 75 . 70 65 60 Steer Price ($/Cwt.) 55 50 45 40 35 75 77 79 81 83 85 87 89 91 93 95 97 99 01 Year . Source: USDA

49. But This Year’s Average Will Be Near Last Year Year & Quarter Kansas Slaughter Steer Price

50. Futures Anticipate A Decline To The Mid-$60’s This Summer