Will Herd Expansion Get Underway in 2003?
The current cattle cycle began in 1990 when the U.S. cattle and calf inventory bottomed out at 95.8 million head, the smallest total inventory since 1959. The current cycle likely entered its 14th year on January 1, 2003, with an all cattle and calves inventory virtually unchanged from 1990s (USDA is scheduled to release the annual cattle inventory report on January 31, 2003, after this column went to press). The average cattle cycle length is about 10 years, so the current cycle is already significantly longer than normal.

Calf prices peaked during the current cycle in 1991, averaging about $100 per cwt. for 500 to 600 pound steers in western Kansas. By the time all the cattle and calves inventory peaked in the mid-1990s, the annual average western Kansas steer calf price dropped below $72 per cwt. (in 1995) and actually hit bottom in 1996 near $61. The rapid drop in calf prices from 1995 to 1996 was partly the result of increasing beef supplies, but was exacerbated by escalating corn prices. Reductions in cattle supplies, declining corn prices, and a modest improvement in beef (and cattle) demand combined to push western Kansas calf prices into the upper $90s during 2000 and 2001, before dropping back to the low $90s in 2002.

The U.S. cattle herd has been shrinking in size since the mid-1990s. Dry weather conditions, and the resulting poor pasture and range conditions in much of the U.S., combined with a decline in cattle prices in late 2001 and early 2002 discouraged cow-calf operators from expanding their herds. But the industry is poised to start rebuilding inventories in 2003, if forage supplies are adequate. This is important because, historically, the highest cattle prices of a given cattle cycle generally occur during the early portion of the rebuilding phase. As a result, prices are expected to increase during 2003 and the highest prices of this cattle cycle could occur in 2003 or, more likely, 2004 as cow-calf producers hold females back from slaughter to rebuild their inventories.

Projections
Average cow-calf operations earned a positive return above cash costs during 2001 and 2002, but the return was modest. Moreover, live cattle and wholesale beef demand, which reversed a two-decade long decline and rose moderately in the late 1990s and 2000, weakened starting in late 2001 and most of 2002. Combined with poor pasture and range conditions in much of the Great Plains, West, and Southeast, weaker cattle prices during 2002 likely discouraged cow-calf producers from expanding their herds.

But the rebound in slaughter cattle and calf prices, which got underway in late 2002 and early 2003, should stimulate interest in herd expansion this year. The key will likely be weather conditions. At the beginning of 2003 much of the West, Western Corn Belt, and portions of the Great Plains were still in various stages of drought. However, conditions in Texas, most of Oklahoma, and nearly all the Southeast were rated normal. If it becomes apparent that adequate forage production will be available this coming year, look for modest herd rebuilding to get underway in 2003. An expansion of the drought, however, could lead to yet another year of modest herd liquidation.

Assuming drought conditions moderate, the reduction in female slaughter that will accompany the onset of herd rebuilding means cattle slaughter during 2003 should fall below 2002s by three, to as much as four, percent. In keeping with the long-term trend, annual average dressed cattle weights will likely be heavier than in 2002, but the increase will be modest, averaging less than one percent above the prior year. As a result, beef production during 2003 is expected to wind up about three percent smaller than 2002s. Cattle slaughter and beef production are both likely to fall again in 2004 if herd rebuilding accelerates, as expected.

Declining cattle slaughter and beef production should provide cattle producers with higher prices the next couple of years. Kansas slaughter steer prices averaged about $67 per cwt. (live weight) during 2002. Smaller beef supplies should help push the 2003 annual slaughter cattle price average up into the mid-$70s. At the same time, calf prices are also expected to rise in 2003, with an annual average price approaching $100 for 500-600 pound steer calves, about 10 percent higher than in 2002.

One factor to watch closely in 2003 and 2004 will be feed grain prices. Shifts in feed grain prices can have a big impact on cattle prices, especially calf and feeder cattle prices. Tight feed grain stocks mean that weather conditions and crop production in the Corn Belt during summer 2003 will be critical. A shortfall in corn production could push corn prices up substantially next summer and, similar to 1996, produce weaker feeder cattle and calf prices than projected. ©