First Quarter Summary of Meats

By John Lawrence - First quarter 2006 was a disappointing quarter for cattle and hog producers. Seasonally, we expect cattle prices to be stable to higher during the quarter and hog prices typically are stable as well.
calendar icon 24 April 2006
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The second quarter is when the two prices are expected to diverge with cattle prices moving lower and hog prices moving higher. Hopefully, that trend is likely to continue, but with the large decline in cattle prices during the first quarter it is questionable of how much lower they will fall. Some analysts are comparing this year to 2002 in the meat markets and there are some similarities. There was a lot of protein on the domestic market and poultry, pork, and beef prices were depressed in 2002. That year, first quarter poultry exports dropped 12% from the year before putting extra broiler meat on the US market. This year broiler exports were off and poultry in cold storage at the end of February was a record high, 20% above the previous year. Per capita pork consumption first quarter 2002 was 12.3 pounds and it is estimated to be 12.5 pounds in 2006. Thus, there were ample supplies of competing meats on 2002 and in 2006.

Beef Market...

First quarter beef production totaled 6.58 billion pounds, 6.4% higher than first quarter 2005. Cattle slaughter was up 3.9% and carcass weights increased 2.4%. Fed cattle prices have dropped dramatically since a high near $95 in mid-January. Iowa live prices dropped $9.50 from the first week of January to the last week of March, and over $10 from the high the third week of January. Typically we would see the market steady to higher through the first quarter with the spring high coming in either March or April and a low in July or August. But, what does “typical” mean.

Let’s look at the weekly Iowa live price for 18 years, 1988-2005. The high price for the year occurred in the first, second, and four quarter an equal number of times (Table 1). The low occurred more often in the third quarter. The average decline from the high in the first two quarters to the low of the third quarter was $10.95 or 14% from the high. The smallest decline was $2.50 (4%) and the largest decline was $16.37 (20%). A 20% decline from the high this year would be a $19 decline.

The decline we experienced in the first quarter of 2006 is nearly equal to the average decline we have seen over the last 18 years. To match the largest decline for 1988-2005 we have another $6 or more to go. The June futures at this writing are suggesting that we may surpass the $16 decline this year. Keep in mind that this price decline is from a high near $95 in January. If you go back a little further there was a $24 drop from high to low in 1979 and a $22 drop in 1973. What makes 1973 interesting was that it occurred from a high in August and a low in September. Dark days for cattle feeders to be sure.

Breakeven selling price on yearling cattle is in the upper $80s and low $90s for most of the summer and early fall marketings. Cattle feeders will lose money on most of these cattle and will be tempted to hold them longer in hopes of higher prices. We have already had record carcass weights for the early spring. The added weight will add to cost for the individual and added weight for the market. Such a backlog will postpone the timing of the low for the year and any recovery.

There are some similarities for the cattle market between 2006 and 2002. Cattle on feed inventories and carcass weights were relatively high in both years. Because of the low slaughter rates in early 2006, beef supplies thus far in 2006 are well below the 2002 levels. However, the Iowa fed cattle prices fell $10 in 6 weeks in early 2002 and nearly $15 from spring high to summer low. At this writing fed cattle prices have fallen $10 in 10 weeks and are likely going lower. The low in 2002 came in early July, but the recovery didn’t begin until the first of October. Something to keep in mind for this summer.

Hog Market...

First quarter pork production totaled 5.32 billion pounds, 3.5% higher than first quarter 2005. Hog slaughter was up 2.6% and carcass weights increased 0.9%. The futures market moved lower on the summer months and higher on the fall an winter months following the USDA Hogs and Pigs report. Iowa dressed prices rallied $8/cwt from Thanksgiving to mid-February which is a fairly typical price pattern. First quarter prices peaked the week of February 24 at $66 and declined to under $57 by the end of March.

Table 2 shows that over the last 20 years the high most often occurs in the second quarter and the low most often in the fourth quarter. Prices are expected to rally somewhat this year during the second quarter and may well put in the high during the second quarter. Fourth quarter prices are expected to be the annual low again this year.

Hog producers had a tough 2002 as well. Second and third quarter prices fell 30% or more from the same quarter the previous year as poultry exports and the price of domestic poultry at retail counters decreased. Producer losses mounted and per head losses were approximately $36/head in the late summer.

Based on the estimated livestock returns for farrow to finish operations, producers have been profitable since February 2004. March 2006 marks 26 consecutive months of profitability and the streak is expected to continue through the summer. Rising feed prices and declining hog prices will pressure margins after Labor Day.

Looking ahead...

Beef and pork supplies are growing in the months and years ahead and red meat demand will be pressured by lower price poultry and higher energy cost. Producers should consider a more aggressive risk strategy while prices trend lower. Futures, options, and livestock risk insurance should be considered.

Source: John Lawrence, Iowa Farm Outlook - April 2006

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