Cattle Price Determination

Transcription

1 Looking Ahead In The Cattle Market Professor & Extension Ag. Economist, Livestock Marketing Department of Agricultural Economics 1 K-State Research & Extension Cattle Price Determination PRICE Demand Supply P 0 QUANTITY Q 0 6 K-State Research & Extension Test Your Knowledge of Cattle Cycles? When did the U.S. cattle inventory reach its all-time peak? How many head were in the U.S. cattle herd (all cattle & calves) at its peak? How does this compare with today? How long is the average cattle cycle? 7 K-State Research & Extension 1

2 U.S. Cattle Inventory January 1, All-Time Inventory Peak Million Head Source: USDA K-State Research & Extension Million Head U.S. Cattle Inventory January 1, Current inventory is about 26% smaller than in 1975 January 1,2000 = Million Head. 1.1% Less Than. on Jan. 1, Source: USDA K-State Research & Extension Cattle Inventory (Million Head) Cattle Inventories By Cycle /1/ Source: USDA & KSU of Cycle Average Cycle Length Is About 10 s K-State Research & Extension 2

3 Cattle Slaughter Varies Cyclically U.S. Cattle Slaughter (Including Calves & Farm Slaughter) Million Head Source: USDA 18 K-State Research & Extension Cattle Slaughter Varies Cyclically 45 U.S. Cattle Slaughter (Including Calves & Farm Slaughter) Mid- s Slaughter Peak 40 Million Head Source: USDA 19 K-State Research & Extension Cattle Slaughter Varies Cyclically U.S. Cattle Slaughter (Including Calves & Farm Slaughter) 45 Million Head Mid- s Slaughter Peak Source: USDA 20 K-State Research & Extension 3

4 Cattle Slaughter Varies Cyclically U.S. Cattle Slaughter (Including Calves & Farm Slaughter) 45 Million Head Mid- 90 s Slaughter Peak Source: USDA 21 K-State Research & Extension But Cyclical Slaughter Variation Is Smaller Now Than In The Past 60% Percentage Difference In Cattle Slaughter. From Cycle Peak to Cycle Trough. % 40% 30% 20% 10% 0% ? Source: USDA & K-State Cycle 22 K-State Research & Extension Examining Rate of Change In Herd Size Is Useful When Predicting Slaughter 8 U.S. Cattle Inventory Growth Rate Percent Source: USDA & KSU 23 K-State Research & Extension 4

5 Returns In The Cow-Calf Sector Stimulate Expansion & Contraction 2 Estimated Cow-Calf Returns. 200 $'s Per Cow Source: K-State Research & Extension Returns ABove Variable Costs KSU Projection For 1999 & K-State Research & Extension Returns In The Cow-Calf Sector Stimulate Expansion & Contraction $'s Per Cow Estimated Cow-Calf Returns. Losses Stimulated Liquidation Source: K-State Research & Extension Returns ABove Variable Costs KSU Projection For 1999 & K-State Research & Extension Returns In The Cow-Calf Sector Stimulate Expansion & Contraction $'s Per Cow Estimated Cow-Calf Returns. Profits Will Stimulate Expansion Source: K-State Research & Extension Returns ABove Variable Costs KSU Projection For 1999 & K-State Research & Extension 5

6 Test Your Knowledge of Cattle Prices 1 What was the record high (annual average) for slaughter cattle prices? 2 What was the low (annual averagesince 19) for slaughter cattle prices? 3 Where are current cattle prices relative to 10 years ago? 27 K-State Research & Extension Slaughter Cattle Prices By Cycle 1990-? Price ($/cwt.) of Cycle K-State Research & Extension Price ($/cwt.) Slaughter Cattle Prices By Cycle 1990-? Record High of $79 occurred in of Cycle K-State Research & Extension 6

7 Slaughter Cattle Prices By Cycle 1990-? Price ($/cwt.) Low of $22 occurred in of Cycle K-State Research & Extension Price ($/cwt.) Slaughter Cattle Prices By Cycle 1990-? Prices in 1999 averaged 17% below their 1990 level of Cycle K-State Research & Extension Are Changes In Cattle Inventories The Only Factor That Affects Supplies? 36 K-State Research & Extension 7

8 30 25 Commercial Beef Production By Cycle 1990-? Billion Pounds of Cycle K-State Research & Extension Beef Production Has Been In A Long Term Uptrend U.S. Commercial Beef Production Billion Pounds Source: USDA 42 K-State Research & Extension But Cattle Slaughter Has Fallen Sharply Since Mid- s U.S. Cattle Slaughter (Including Calves & Farm Slaughter) Million Head Source: USDA 43 K-State Research & Extension 8

9 & Beef Production Has Been Relatively Stable Since Mid- s U.S. Commercial Beef Production Billion Pounds Source: USDA 44 K-State Research & Extension Are Changes In Cattle Inventories The Only Factor That Affects Supplies? What caused the long-term trend up in beef production? Why has beef production been relatively stable since the mid- s while cattle slaughter was declining? 45 K-State Research & Extension Slaughtering Cattle at Heavier Weights Dressed Wt./Head (Lbs.) Commercial Cattle Carcass Weights. Trend Source: USDA & KSU 46 K-State Research & Extension 9

10 & Technology Improvements Dressed Beef Production. Per Cow Per. Beef Production Per Cow Trendline 0 Pounds Source: USDA & KSU. 47 K-State Research & Extension Cattle Cycle Summary Cattle inventories vary cyclically Point in cattle cycle important in determining annual slaughter Herd liquidation or expansion is important Most dramatic slaughter (& beef production) decline occurs when producers start to expand inventories 48 K-State Research & Extension Cattle Cycle Summary Cattle inventories vary cyclically Point in cattle cycle important in determining annual slaughter Herd liquidation or expansion is important Most dramatic slaughter (& beef production) decline occurs when producers start to expand inventories & this could start to happen in late 2000 or early K-State Research & Extension 10

11 Cattle Cycle Summary But other factors also affect supplies cattle weights cattle & beef trade K-State Research & Extension Beef & Cattle Trade Has Become An Important Component of Beef Supply & Demand 51 K-State Research & Extension U.S. Beef, Veal and Live Animal Imports Annual, Billion Lbs, Carcass Weight Basis Billion Lbs Total Canada Mexico Source: Livestock Marketing Information Center & MSU Trade Research Center 1999 Values are Estimates 52 K-State Research & Extension 11

12 U.S. Beef, Veal and Live Animal Exports Annual, Billion Lbs, Carcass Weight Basis Billion Lbs Total Source: Livestock Marketing Information Center & MSU Trade Research Center 1999 Values are Estimates 53 K-State Research & Extension U.S. Beef, Veal and Live Animal Net Imports Annual, Carcass Weight Equivalents Billion Lbs Mexico Canada Total Source: Livestock Marketing Information Center & MSU Trade Research Center 1999 Values are Estimates 54 K-State Research & Extension Value of U.S. Beef, Veal and Live Animal Net Imports/Exports Million $ , ,0.0-2, Mexico Canada Total Source: Livestock Marketing Information Center & MSU Trade Research Center 1999 Values are Estimates 55 K-State Research & Extension 12

13 Effect of Beef Trade 1 U.S. has a comparative advantage in high quality beef production 2 U.S. exports high & low quality beef, but the low quality beef is primarily by-products 3 On balance, beef & cattle trade has effectively reduced the beef supply available for domestic consumption resulting in higher U.S. prices 56 K-State Research & Extension What About Beef Demand? 57 K-State Research & Extension Plotting Inflation Adjusted Price vs. Per Capita Consumption Provides A Picture of Beef Demand Deflated Beef Price - Cents per Lb Beef Price Quantity Relationships Annual, Per Capita Consumption - Retail Weight Source: USDA & Commerce Dept. Price Deflated by GDP Implicit Price Deflator 1999= 58 K-State Research & Extension

14 Declining Demand Has Plagued The Beef Industry For 20 s Deflated Beef Price - Cents per Lb Beef Price Quantity Relationships Annual, Beef Demand Declined Precipitously During The 19 s Per Capita Consumption - Retail Weight Source: USDA & Commerce Dept. Price Deflated by GDP Implicit Price Deflator 1999= 59 K-State Research & Extension Declining Demand Has Plagued The Beef Industry For 20 s Deflated Beef Price - Cents per Lb Beef Price Quantity Relationships Annual, Downward Shifts In Beef Demand Per Capita Consumption - Retail Weight Source: USDA & Commerce Dept. Price Deflated by GDP Implicit Price Deflator 1999= 60 K-State Research & Extension Declining Demand Has Plagued The Beef Industry For 20 s Deflated Beef Price - Cents per Lb Beef Price Quantity Relationships Annual, Demand Continued To Decline During the 1990 s Per Capita Consumption - Retail Weight Source: USDA & Commerce Dept. Price Deflated by GDP Implicit Price Deflator 1999= 61 K-State Research & Extension

15 But Demand Showed Signs of Strengthening In Late 98 & 99 Deflated Beef Price - Cents per Lb Beef Price Quantity Relationships Annual, But showed signs of improving in 1998 &, especially, in Per Capita Consumption - Retail Weight Source: USDA & Commerce Dept. Price Deflated by GDP Implicit Price Deflator 1999= 62 K-State Research & Extension 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 63 K-State Research & Extension Beef Demand Indices Computed At Three Different Market Levels Index Value Retail Beef, Live Steer & ChoiceBoxed Beef Cutout..Demand Indices, 1990=. 97 Retail Choice Beef Live Steer Beef Cutout Source: USDA, U.S. Dept. of Commerce & K-State Research & Extension. 64 K-State Research & Extension 15

16 Beef Demand Was Declining Through 1997 Index Value Retail Beef, Live Steer & ChoiceBoxed Beef Cutout..Demand Indices, 1990=. 97 Retail Choice Beef Live Steer Beef Cutout Source: USDA, U.S. Dept. of Commerce & K-State Research & Extension. 65 K-State Research & Extension Beef Demand Showed Signs of Stabilizing in 1998 Index Value Retail Beef, Live Steer & ChoiceBoxed Beef Cutout..Demand Indices, 1990=. 97 Retail Choice Beef Live Steer Beef Cutout Source: USDA, U.S. Dept. of Commerce & K-State Research & Extension. 66 K-State Research & Extension Beef Demand Improved In 1999 Index Value Retail Beef, Live Steer & ChoiceBoxed Beef Cutout..Demand Indices, 1990=. 97 Retail Choice Beef Live Steer Beef Cutout Source: USDA, U.S. Dept. of Commerce & K-State Research & Extension. 67 K-State Research & Extension 16

17 Beef Demand Summary Beef Demand declined for approximately 20 years through 1997 Recovery in beef demand during 1999 was modest, (i.e., 1999 demand was still well below level of early 1990 s), but significant in that it signaled a trend change Beef demand strength will be critical in determining how high prices go the next several years 68 K-State Research & Extension Other Sources of Information Cattle On Feed Fed Cattle Marketings Placements of Cattle On Feed 69 K-State Research & Extension Cattle On Feed Reports Primarily useful as a short to intermediate run indicator of supplies K-State Research & Extension 17

18 This The On Feed Inventory Has Been Large State Cattle On Feed. Lots Over 0 Head Million Head Yr. Avg. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: USDA & KSU Month 71 K-State Research & Extension & Fed Cattle Marketings Have Also Been Large 90 7 State Average Daily Fed Cattle Marketings Lots Over 0 Head 85 Thousand Head Yr. Avg. 60 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: USDA & KSU Month 72 K-State Research & Extension Placements Finally Dropped Below A Ago During March State Net Placements. Lots Over 0 Head Yr. Avg. Million Head Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: USDA & KSU Month 73 K-State Research & Extension 18

19 What About Feeder Cattle & Calf Prices? Feeder Cattle & Calf Prices are derived from expected slaughter cattle prices & the expected cost of raising cattle to slaughter weight 74 K-State Research & Extension Slaughter Steer & Steer Calf Prices Are Highly Correlated 110 W. Kansas Slaughter & Pound Steer Prices Annual Averages 90 Price ($/cwt.) W. Kansas Slaughter Steers W. Kansas pound steers K-State Research & Extension But They Are Not Perfectly Correlated 110 W. Kansas Slaughter & Pound Steer Prices Annual Averages 90 Price ($/cwt.) W. Kansas Slaughter Steers W. Kansas pound steers K-State Research & Extension 19

20 Discrepancy Between Slaughter & Feeder Price Movement Accounted for by Changes In Feed Costs Corn Price ($/bu.) Kansas Monthly Corn Prices Average = $2.23/bu Average = $2.40/bu Average = $2.65/bu Source: Kansas Ag. Statistics-USDA 77 K-State Research & Extension Discrepancy Between Slaughter & Feeder Price Movement Accounted for by Changes In Feed Costs Corn Price ($/bu.) Kansas Monthly Corn Prices Average = $2.23/bu Average = $2.40/bu Average = $2.65/bu Source: Kansas Ag. Statistics-USDA Corn Price Increase Responsible For Calf Price Collapse 78 K-State Research & Extension What About Feeder Cattle & Calf Prices? Annual models indicate a $1 increase in annual slaughter steer price is associated with a $1.85 increase in lb. steer price annual average A $0.10 increase in annual corn price is associated with a $0.85/cwt. decline in lb. steer price annual average 79 K-State Research & Extension 20

21 Seasonal Price Patterns Cattle prices tend to follow strong seasonal patterns, i.e., prices tend to reach their peak and their lows at about the same time each year Knowledge of the seasonal pattern is helpful in identifying the path prices will follow within a year K-State Research & Extension Slaughter Steer Prices Peak in Spring & Again In Fall Percent of Annual Average W. KS Cwt. Slaughter Steer Price Index Index Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec Month 81 K-State Research & Extension Heavy Feeder Prices Are Strongest in Late Winter 105% 104% Billings 7-8 Cwt. Steer Price Index Percent of Annual Average 103% 102% 102% 101% 101% % 99% 98% 97% 101% % 99% % Index % % 99% 99% 99% 99% 96% 95% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: LMIC & KSU Month 82 K-State Research & Extension 21

22 Light Weight Steer Prices Peak In Spring Billings 5-6 Cwt. Steer Price Index 105% 105% 104% 103% 104% 103% Percent of Annual Average 102% 101% % 99% 98% 97% 101% 102% Index 102% 98% 98% 98% 97% 96% 97% 96% 95% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: LMIC & KSU Month 83 K-State Research & Extension Cull Cow Prices Bottom Out In Fall Billings Utility Cow Price Index % of Annual Average Price 106% 104% 102% % 98% 96% 94% 92% 96% 103% 105% 104% 104% 104% 104% 103% 101% 96% Index 91% 90% 90% 88% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: LMIC & KSU Month 84 K-State Research & Extension Futures Market Based Forecasts Futures markets are relatively efficient Consequently, it s difficult to generate forecasts that consistently outperform futures market forecasts Futures markets are a source of continuously updated price forecasts 85 K-State Research & Extension 22

23 Futures Market Based Forecasts How do we use futures prices to generate a cash market forecast? Recall that Basis = Cash Price - Futures Price rearranging Basis + Futures Price = Cash Price To obtain a cash price forecast, insert a basis forecast into the above equation 86 K-State Research & Extension Forecasting Basis Basis is straightforward to forecast Basis follows seasonal patterns & is much easier to forecast than either cash or futures prices KSU research indicates that the most recent 3 year average basis generally yields the best cattle basis forecasts 87 K-State Research & Extension Example of Basis Data to Use When Forecasting Basis 2 August CME Live Cattle Basis. W. KS Lb. Choice Steers '97-'99 Max -3 '97-'99 Avg '97-'99 Min -4 6/30 7/7 7/14 7/21 7/28 8/4 8/11 8/18 8/25 Week Ending Source: USDA & KSU 8/25 Data for 1999 Only Basis ($'s/cwt.) 88 K-State Research & Extension 23

24 What s A Reasonable Basis Forecast for mid-august? 2 August CME Live Cattle Basis. W. KS Lb. Choice Steers '97-'99 Max -3 '97-'99 Avg '97-'99 Min -4 6/30 7/7 7/14 7/21 7/28 8/4 8/11 8/18 8/25 Week Ending Source: USDA & KSU 8/25 Data for 1999 Only Basis ($'s/cwt.) K-State Research & Extension What s A Reasonable Basis Forecast for mid-august? 2 August CME Live Cattle Basis. W. KS Lb. Choice Steers '97-'99 Max -3 '97-'99 Avg '97-'99 Min -4 6/30 7/7 7/14 7/21 7/28 8/4 8/11 8/18 8/25 Week Ending Source: USDA & KSU 8/25 Data for 1999 Only Basis ($'s/cwt.) 90 K-State Research & Extension What s The Risk Associated With This Basis Forecast? 2 August CME Live Cattle Basis. W. KS Lb. Choice Steers '97-'99 Max -3 '97-'99 Avg '97-'99 Min -4 6/30 7/7 7/14 7/21 7/28 8/4 8/11 8/18 8/25 Week Ending Source: USDA & KSU 8/25 Data for 1999 Only Basis ($'s/cwt.) 91 K-State Research & Extension 24

25 How Has This Basis Forecasting Technique Performed in 2000? 2 1 February CME Live Cattle Basis. W. KS Lb. Choice Steers. '97-'99 Max '97-'99 Min 2000 '97-'99 Avg Basis ($'s/cwt.) /7 1/14 1/21 1/28 2/4 2/11 2/18 2/25 Week Ending Source: USDA & KSU 2/25 Data for 1999 Only 92 K-State Research & Extension How Has This Basis Forecasting Technique Performed in 2000? 1 April CME Live Cattle Basis. W. KS Lb. Choice Steers. 0 Basis ($'s/cwt.) '97-'99 Max '97-'99 Avg -4 '97-'99 Min /3 3/10 3/17 3/24 3/31 4/7 4/14 4/21 4/28 Week Ending Source: USDA & KSU 4/28 Data for 1999 Only 93 K-State Research & Extension Using Futures To Generate A Price Forecast Current futures price + Basis forecast (for time of delivery) Cash Price Forecast 94 K-State Research & Extension 25

26 Example of Futures Based Slaughter Steer Price Forecasts Mid-Month Futures Based Price Forecasts W. Kansas 1-13 Lb. Choice Steers 3 Yr. Avg. Basis Most Neg. Basis Most Pos. Basis $/cwt Jun. Jul. Aug. Sep Oct. Nov. Dec. Jan. '01 Feb. '01 Mar. '01 Apr. '01 Month Source: CME & K-State Forecasts = Friday Futures Settlement Prices + Basis Estimates 95 K-State Research & Extension Example of Feeder Steer Basis Forecasts Mid-Month Feeder Steer Basis Forecasts. 0-0 Lb. Steers, Billings, MT. 3 Yr. Avg. Basis Forecast Most Neg. of Last 3 Yrs. Basis Forecast Most Pos. of Last 3 Yrs. Basis Forecast Basis ($/cwt.) Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. '01 Feb. '01 Mar. '01 Month & Source: CME & K-State Basis = Cash Price- Nearby Futures Price 96 K-State Research & Extension Example of Futures Based Feeder Steer Price Forecasts $/cwt Jun. Jul. Mid-Month Futures Based Price Forecasts. 0-0 Lb. Feeder Steers, Billing, MT. Aug. Sep. Oct. Nov. Month &. Source: CME & K-State Forecasts = Friday Settlement Prices + Basis Estimates 3 Yr. Avg. Basis Most Neg. Basis Most Pos. Basis Dec. Jan. '01 Feb. '01 Mar. '01 97 K-State Research & Extension 26

27 Updated Cash Price Forecasts Available Every Week Where? K-State Livestock & Meat Marketing Web Site livestock 98 K-State Research & Extension What s Current Situation? We are in 11th year of current cycle Cow-calf returns are positive Barring a dramatic feed grain price rise, odds favor a transition from cattle herd liquidation to expansion sometime in the next year When that happens, slaughter & beef production will decline rapidly & prices will rise 99 K-State Research & Extension What s Current Situation? Slaughter cattle price improvement in 1999 and 2000 has been demand (not supply) driven Big question is how strong beef demand will be the rest of 2000 & 2001 If demand remains strong, odds favor establishing new record high slaughter cattle prices over the next two years K-State Research & Extension 27

28 & Set New Highs For Calf Prices Price ($/cwt.) Billings, MT Pound Steer Prices Annual Average Source: USDA & K-State 101 K-State Research & Extension & Set New Highs For Calf Prices Price ($/cwt.) Billings, MT Pound Steer Prices Annual Average So far, prices in 2000 have averaged 18% higher than in Source: USDA & K-State 102 K-State Research & Extension Increasing Returns To Information A growing percentage of cattle will be marketed under a grid pricing system which rewards carcass quality characteristics Producers that have information regarding the carcass quality characteristics of their cattle will have an advantage 103 K-State Research & Extension 28

29 Alternative Ways to Market Pen 186 steers on feed 147 days, ADG=3.8, Conversion=6.9, 883 lb carcass Attribute USDA Grid Prime +$8.00 Base Price $99.40/cwt Dressed Basis CAB +$2. Choice +$0.00 Live Price $61.00/cwt Select -$5.00 Choice Dressed $99.40/cwt Standard -$15.00 Select Dressed $94.40/cwt Outs -$25.00 YG 1 +$2.00 YG 2 +$1.00 YG 3 +$0.00 YG 4 -$12.00 YG 5 -$17.00 <5 lbs. -$20.00 >9 lbs. -$20.00 Value of Managing Cattle Attributes Attribute USDA Grid Percent Prime +$ CAB +$ Choice +$ Select -$ Standard -$ Outs -$ YG 1 +$ YG 2 +$ YG 3 +$ YG 4 -$ YG 5 -$ <5 lbs. -$ >9 lbs. -$ PRICE $97.57/cwt carcass weight 186 steers on feed 147 days, ADG=3.8, Conversion=6.9, 883 lb carcass, Choice, YG-3 price = $99.40/cwt Value of Managing Cattle Attributes Attribute USDA Grid Percent Percent Prime +$ CAB +$ Choice +$ Select -$ Standard -$ Outs -$ YG 1 +$ YG 2 +$ YG 3 +$ YG 4 -$ YG 5 -$ <5 lbs. -$ >9 lbs. -$ PRICE $97.57/cwt $99.03/cwt $2,397 pen revenue 186 steers on feed 147 days, ADG=3.8, Conversion=6.9, 883 lb carcass, Choice, YG-3 price = $99.40/cwt 29

30 Value of Managing Cattle Attributes Attribute USDA Grid Percent Percent Prime +$ CAB +$ Choice +$ Select -$ Standard -$ Outs -$ YG 1 +$ YG 2 +$ YG 3 +$ YG 4 -$ YG 5 -$ <5 lbs. -$ >9 lbs. -$ PRICE $97.57/cwt $99.55/cwt $3,246 pen revenue 186 steers on feed 147 days, ADG=3.8, Conversion=6.9, 883 lb carcass, Choice, YG-3 price = $99.40/cwt Value of Managing Cattle Attributes Attribute USDA Grid Percent Percent Prime +$ CAB +$ Choice +$ Select -$ Standard -$ Outs -$ YG 1 +$ YG 2 +$ YG 3 +$ YG 4 -$ YG 5 -$ <5 lbs. -$ >9 lbs. -$ Value of Managing Attributes $2.81/cwt or $24.81/head or $4,608/pen PRICE $97.57/cwt $.38/cwt $4,608 pen revenue 186 steers on feed 147 days, ADG=3.8, Conversion=6.9, 883 lb carcass, Choice, YG-3 price = $99.40/cwt 30