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Cattle squeeze

Because of drought conditions in many grazing areas, the number of U.S. cattle on feed is at a record high. So, why are cash cattle prices not going lower?

The quick and easy answer is that just because there are a lot of cattle on feed, it doesn't mean a lot are being sold, says Adam Frick, Allendale livestock analyst. But those cattle will eventually hit the market.

A similar question about fed cattle flooding the market was being asked in 2005, Frick says.

"In January 2005, there was an apparent wall of cattle that was supposed to create a supply glut in August," Frick says. "We got to August and made cash cattle highs. So everybody was asking where that wall of cattle went."
With the record amount of cattle on feed, the industry is talking about another wall of cattle.

USDA, in its November report, estimated 11.859 million head of cattle on feed -- a record-high for November and 4.2% higher than one year ago.

"With the weight breakdowns and supply situation, we are looking at the February-April 2007 time frame when a pretty good supply glut could be coming down the line," Frick says.

If everyone is thinking the same way, feeder operators normally would steer away from that glut time frame. However, with corn prices going higher, the quicker the animal is fed out, the lower the cost of production.

Because there doesn't seem to be any easy way to avoid a huge beef supply between February-April of 2007, the industry is hoping for a big appetite coming from somewhere. Frick says the domestic demand is a concern.

"We've had the seventh consecutive quarter of a decline in beef demand at the retail level," Frick says. "This tells you the demand structure is very, very weak."

Weak beef demand could lower fed cattle prices in 2007, making producer profit margins tighter.

Frick says if the producer isn't able to make money off fed cattle, then buying cheaper feeder cattle is the next option.

Last year, feeder cattle were as much as $23 per hundredweight higher than cash cattle.

"This year," Frick says, "with corn prices going higher, you could see a correction between those two classes of cattle. I think you'll see a difference of only $5 to $10."

Frick adds, "I've heard from a floor trader at the Chicago Mercantile Exchange that feeder cattle would trade below fat cattle at some point."

Meanwhile, beef demand is seen as being key for 2007 cattle prices. One demand wild card may be that consumers are spending less on gasoline and natural gas compared to a year ago.

"That has to continue to happen if we are going to keep cattle prices stable or above $90 per hundredweight throughout 2007," he says.

For 2007, Allendale Inc. has estimated an average annual fat cattle price of $86 per hundredwieght, with summer lows below $80.

Meanwhile, U.S. beef exports, sharply lower since the discovery of BSE (mad cow) in 2003, are not seen returning to normal levels until 2010, Frick says.

Allendale Inc.
4506 Prime Parkway, McHenry, IL 60050

Because of drought conditions in many grazing areas, the number of U.S. cattle on feed is at a record high. So, why are cash cattle prices not going lower?

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