Demand is Key for 2006 Cattle Outlook

For cattle producers, the good news is that feedlot supplies aren't burdensome.

Published on: Nov 10, 2005

Cattle producers will struggle to breakeven in 2006, says John Lawrence, Iowa State University extension.

Cattle markets have also reached a new, higher price level as beef demand has rebounded more than 25% in the last seven years. How long this demand strength will continue remains unknown. Already, beef demand are showing signs of weakening, which could impact the price outlook in 2006, says Lawrence. "If demand goes away, we could be in a world of hurt," he warns.

The choice the consumer makes at the meat counter—between pork and beef—will have a big impact on demand this coming year. Total meat and poultry supplies are rising, creating more competition at retail. In addition, rising energy costs will shrink the consumers' food budget next year.

Beef demand will be more vulnerable to high fuel prices since more steaks are sold in restaurants than pork, notes Lawrence.

For cattle producers, the good news is that feedlot supplies aren't burdensome right now. Cattle weights, however, are approaching the all-time record set in 2002. "But in 2002 we had a record number of cattle on feed and record weights," he points out. "There was a huge total supply of beef and it was a disastrous year for cattle producers. Now, supplies are more in check, but weights are still a problem."

Many cattle producers are losing money right now due to high prices for a limited supply of feeder cattle, says Lawrence. Breakevens are averaging about $90 per cwt. for cattle producers and are expected to climb higher this winter.

The Livestock Marketing Information Center forecasts that prices for choice fed steers will average $85 to $88 per cwt. in the first quarter of 2006, $83 to $88 in the second quarter, $78 to $83 in the third quarter and $81 to $87 in the fourth quarter.

Will reopening Japan's borders make difference?

Lawrence says the futures market has already factored in the possibility that Japan will resume purchases of U.S. beef by the end of 2005. "I think we have so much anticipation built into the Japanese announcement that it can't possibly live up to expectations," he adds. "Once the border opens legally, it will still take time to ship beef into Japan. Also, someone has to buy it once it arrives there."

When Japan lifts the ban, U.S. packers will probably rush to fill orders and cattle producers could see a short-term rally in prices, says Lawrence. However, not all cattle will qualify for the Japanese market. Japan will only accept U.S. cattle under 20 months of age. Some cattle may bring a very high price because they are eligible for the Japanese market. "We may end up with a two tier cattle market here in the U.S. for awhile," he adds.

The United States must verify the age of cattle through a Quality Assessment Assurance program, which creates a paper trail that can be audited, with birth records traced back to the farm or through maturity inspections at the packing plant. Information about how producers can participate in a QSA program is available at the Iowa Beef Center Web site at www.iowabeefcenter.org.