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LIVESTOCK MONTHLY
Rising Pork Production Dampens Prices
Weekly hog slaughter in the fourth quarter is averaging about 3 percent higher than a year ago, with heavier weights pushing production up about 4 percent. Hog prices in November are averaging about $45 per cwt, down $5 from September. Although hog slaughter usually peaks in early December, prices normally bottom out in late November. With pork production expected to increase about 7 percent in first- quarter 1998, hog prices are likely to remain in the mid-$40 per cwt range.
Composite retail pork prices in October continued below the record high monthly average of $2.36 per pound reached in August. Although retail prices declined, the farm-retail spread reached a record high of $1.62 per pound in October as the farm value has dropped more than the retail price. Retail prices are expected to decline further in the coming months as the farm-retail spread retreats from record highs.
Wholesale pork prices, especially for bellies and loins, have dropped sharply since August. These sharp price declines have made pork much more competitive with chicken and beef. Earlier this year, the relatively high wholesale prices put pork at a competitive disadvantage with beef and chicken for retail features. With expectations of plentiful pork supplies through at least the next year, pork features should increase and bring lower retail prices.
Cattle Cycle Unlikely To Turn Before 2000
The cattle cycle is unlikely to turn before 2000. For the second year in a row, the January 1 Cattle report indicated that cattle producers were retaining a larger number of heifers for breeding the following summer than actually entered the herd. However, in each of the last 2 years, conditions deteriorated and a large proportion of the heifers were marketed as feeder animals rather than being retained for the breeding herd. On January 1, 1997, producers indicated they were retaining 2 percent fewer beef replacement heifers to be bred in the late-spring/early-summer breeding season. However, in the July 1 Inventory report, producers indicated they were retaining 4 percent fewer heifers than a year earlier.
Although feed grain prices were well below a year earlier in the spring and summer of 1997, pasture and range conditions once again were disappointing and hay prices were at record levels, indicating very tight forage supplies. The number of heifers on feed in the 7-monthly reporting states on July 1 were up 28 percent from a year earlier. However, large placements of heavier cattle in each of the summer quarter months raised the specter of even more heifers being placed on feed. This scenario was verified by the October Cattle on Feed report indicating 21 percent more heifers on feed than a year earlier. In addition, heifer slaughter for the first 9 months of the year was at a near-record pace, second only to the major liquidation years of the mid-1970's.
The present cycle entered the liquidation phase in late 1995 and intensified in 1996 as grain stocks declined and prices set new records due to a sharp decline in the 1995/96 grain harvest. Conditions for cow-calf producers were further exacerbated by a severe drought which spread from the Southwest in late spring into the central Plains, the heart of the cattle raising sector of the industry, by mid-summer. Drought resulted in sharply reduced grazing prospects and higher hay prices forcing cattlemen to cull herds sharply and retain fewer stocker cattle. Reduced forage supplies lowered the demand for stocker cattle to be retained for pasture gain and, at the same time, rapidly rising grain prices reduced the break-even prices cattle feeders could pay for feeder cattle to be placed on feed.
Feeder cattle weighing 750 to 800 pounds declined from a range of $67 to $74 per cwt in first half 1995 to $55 to $59 in first-half 1996. Even as feeder cattle prices plummeted, cattle feeders sharply reduced feedlot placements in first-half 1996 to 7.567 million head, down 14 percent from a year earlier. The end result was a year of large losses for feeder cattle producers, and consequently, liquidation of the beef cow herd and sharply reduced heifer retention. Cow slaughter rose from 6.3 million head in 1995 to 7.3 million in 1996. Beef production rose to 25.4 billion pounds, second only to the 25.7 billion pounds produced in 1976 when the cattle inventory was 132 million head and the industry was in the largest liquidation in history.
Beef cow slaughter remained large during the first quarter of 1997, but has been down about 20 percent from a year earlier since spring. Although down, beef cow slaughter remains somewhat large as less efficient cows are culled due to continued tight forage supplies. Cow slaughter is expected to decline even further over the next couple of years. Without larger numbers of heifers being retained and bred, beef cow numbers will continue to decline, and thus, calf crops will decline at least through 1998.
Supplies of feeder cattle outside feedlots and available for placements this fall and in 1998 are already beginning to tighten, with supplies on October 1 down 7 percent from a year earlier. As feeder cattle prices rise due to tighter supplies, calf slaughter will decline as calves are bid into the feedlots rather than slaughtered as vealers. Stronger prices also will attract more imports from Mexico and Canada, but cattle inventories in both of these countries have also declined, reducing supplies for export to the United States.
Feeder cattle supplies will continue to tighten over the next couple of years as the calf crop declines and more heifers are retained for the breeding herd. Supplies will drop through at least 1999, stopping then only if even more heifers are retained for herd expansion this fall and bred next summer to calve in 1999. This reduction in feeder cattle supplies and reduced cow slaughter will hold beef production down until after the turn of the century.
Beef production in 1998 is expected to decline about 2 percent, but production declines in the second half of the year are likely to exceed expectations if forage supplies and grain prices become more favorable. These improved feed conditions would encourage reduced cow culling and increased heifer retention, both would result in even tighter beef supplies. Although beef supplies are declining, resulting in rising cattle and retail beef prices, large and expanding supplies of competing meats will dampen price increases. Shorter biological cycles will allow both the poultry and pork sectors to expand production and share in stronger demand for their products as beef supplies decline. The higher beef prices will also provide some price support for competing products as their supplies rise.
November 19, 1997 Economic Research Service
USDA, Washington, D.C.
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