Beef cow herd liquidation has largely ended, with cow slaughter down sharply. However, the shift to stability and then toward expansion is likely to be slow, not being fully in place until at least 1999. Returns to cow-calf producers are likely to turn positive this year as calf and yearling prices have risen sharply from a year earlier. However, negative returns over the past couple of years caused a larger number of heifers to be shifted to feedlots rather than the breeding herd. While forage conditions have improved in general, hay prices remain high as stocks are rebuilt and grain stocks apparently will remain at relatively low levels for another year.

The U.S. economy remains very positive for the meat sector. Moderate economic growth, low inflation, and stable interest rates are expected to continue through 1998. Consumption expansion has been an important part of this economic strength. Record high consumer confidence is supported by the strong growth in employment and disposable income. Economic growth is expected to slow later this year and into 1998, but decline only by a percentage point from the robust 3-4 percent year-over-year growth since last fall.

In late 1997 and 1998 per capita supplies of total red meat and poultry are expected to resume the expansion that was disrupted by high grain prices beginning in late 1995 and peaking at a record high in mid-1996. Per capita meat supplies declined from a record 211 pounds (retail weight) in 1994 to an expected 209 pounds in 1997. Continued strong consumer purchases and exports will be essential in late 1997 through 1998 to prevent a sharp price decline.

Steady grain prices and short biological cycles will cause pork and poultry supplies to rise in 1998 and more than offset declining beef supplies, leading to record meat consumption of over 214 pounds. As the beef herd begins to stabilize and more heifers and cows are retained for the breeding herd, beef supplies will likely decline through 1999. Stronger export demand compared to the sluggish pace over the past year would produce an even tighter domestic supply situation for higher quality beef and stronger prices.

The August Crop Production report indicated a U.S. corn crop of 9.276 billion bushels, down from the July estimate and slightly below last year. Projected use estimates have been reduced, but 1997/98 ending stocks have been reduced 349 million bushels from last month to 847 million, nearly 100 million bushels below the estimate for 1996/97. The farm price of corn averaged $2.44 a bushel in July, down sharply from $4.43 a year earlier. The farm price of corn is expected to average $2.70 in the 1996/97 crop year and $2.50 to $2.90 in 1997/98, still well below the $3.24 average of 1995/96.

Pasture and range conditions for most of the country remain in the fair to good range, but a few areas need favorable late summer-fall weather conditions for pasture growth and to rebuild hay stocks, which were pulled down sharply in 1996/97. Farmers and ranchers indicated intentions to harvest an estimated 154 million tons of hay this year, up 3 percent from last year, but down slightly from 1995. Grass or other hay production, if realized, is expected is to be record large and 9 percent above a year earlier. While production is up sharply, much of this hay will not be available for sale as farmers and ranchers rebuild hay stocks. Another year of very tight hay stocks and relatively high prices is likely.

Herd expansion plans will have to be weighed carefully given the heavy feeding demands over this past winter. Hay quality is expected to remain a problem with much of this year's harvest. Although other hay production is large, alfalfa hay production is expected to decline 2 percent from last year and 8 percent from 1995. Production in North Dakota is expected to fall 46 percent as harvested acreage declines 24 percent and dry conditions pull down yields. Production in Nebraska is expected to decline 16 percent also due to dry conditions.

Although hay prices have begun to decline seasonally, prices for higher quality hay remain near record highs. Prices for alfalfa hay in July declined to $106 a ton from $115 in June, but remain well above the year-earlier average of $92.90. Dairy and beef feedlot demand for higher quality alfalfa hay is expected to keep prices near record highs through the 1997/98 feeding season. The price of other hays has declined, both seasonally and from a year earlier. The price in July averaged $72.40 a ton, down from $79.40 in June and $75.50 a year ago.

The mid-year Cattle report indicated that the number of cattle and calves on farms and ranches was 108.8 million head, down 2 percent from a year earlier and the lowest for this date since 1992's 107.2 million head. The total cow inventory was down 2 percent, with beef cow numbers down 3 percent and dairy cows continuing the recent decline of 1 percent per year. Beef replacement heifers were down 4 percent while dairy replacement heifers were down 3 percent. However, other heifers were up 1 percent. Consequently, the Cattle report and first-half 1997 slaughter statistics provide a fairly solid view of the transition the cattle inventory and industry is undergoing at this time.

First-half commercial cattle slaughter was down nearly 2 percent from a year earlier, largely reflecting reduced beef cow slaughter and lower steer slaughter. Total cow slaughter was down nearly 8 percent, with beef cow slaughter down 12 percent and dairy cow slaughter down 3 percent. These figures, together with stronger feeder cattle prices and lower grain prices, suggest that herd liquidation has slowed sharply if not ended as conditions for cow- calf producers have improved.

A closer examination of the female stock levels indicate expansion is well in the future. The total number of replacement heifers being retained for possible herd expansion was down more than 3 percent from a year earlier, while heifer slaughter and on-feed inventories suggest tight numbers available for breeding this summer. Heifer slaughter in first-half 1997 was up 7 percent from a year earlier. In addition, the number of heifers on feed in all feedlots with over 1,000 head of capacity on July 1 was up 26 percent from a year earlier. Given the over a million head increase in slaughter and on-feed inventories through midyear, many of the heifers of breeding age are simply not available for calf production.

Second-quarter net placements rose nearly 18 percent compared with the sharply reduced numbers a year ago when grain prices were approaching record levels. This sharp rise follows a 10-percent rise in placements during the first quarter. Large placements combined with the only 2 percent rise in first-half marketings caused July 1 on- feed inventories in feedlots with over 1,000 head of capacity in the 7-monthly reporting states to rise 17 percent from a year earlier. However, fed cattle marketings are expected to remain well above the low 1996 levels until late fall.

Sharply reduced slaughter weights and lower cow slaughter held down beef production in first-half 1997. Cow slaughter will begin rising seasonally in late summer as this year's calf crop is weaned, adding to beef production. In addition, fed slaughter weights are rising seasonally and fed marketings will move production above a year ago through late fall.

Feeder cattle placements are expected to decline, from the large year-earlier levels, this summer through mid-1998. Consequently, once the large on-feed inventory buildup is worked off this fall, fed cattle marketings will remain below year earlier levels through the next couple of years. Strong heifer retention and further reductions in cow slaughter will hold down beef production even more in 1998 and 1999.

Feeder cattle supplies outside feedlots on July 1 were down 5 percent from a year earlier. This year's calf crop is expected to be down 2 percent from a year ago and down 4 percent from 1995. The supply of heavier cattle to place on feed has largely been exhausted. Even reduced second-half placements will have to be supported by placing lighter weight cattle on feed and through reduced calf slaughter.

First- half calf slaughter was down 8 percent from a year earlier. Second- half calf slaughter will decline more sharply as competition for a reduced supply of feeder and stocker calves increases. Improved fall grazing prospects, particularly wheat grazing, would increase demand for stocker calves, as more calves are once again shifted into feedlots. Increased demand for replacement heifers for the 1998 breeding season is likely to further reduce supplies available to go on feed. This year's grain harvest and grain price movements will largely determine just how strong demand for stocker-feeder cattle can become over the next couple of years.

Fed cattle prices are expected to strengthen as beef supplies decline and any increase in beef export demand would further strengthen prices. Cow-calf operators will need to reevaluate the opportunity cost of heifer retention versus sale. Expanding pork and poultry supplies and even lower relative prices will tend to hold down beef price increases or possibly shorten the period of positive returns once beef supplies begin to expand at the turn of the century.

Beef production is expected to decline about 1 percent in both 1997 and 1998. However, third-quarter production will rise from the aberrantly low levels of last summer. Production in summer 1996 was down an unseasonably 4 percent from the second quarter and down 4 percent from the year earlier as rising grain prices reduced feedlot placements in first-half 1996. Production this summer is expected to rise a more seasonal 2 to 3 percent from the second quarter and a year earlier. Following a first-half production decline, beef supplies will be held up in the third and fourth quarters by the large fed cattle inventories at mid-year. However, fourth-quarter cow slaughteris expected to drop well below last year's strong liquidation level.

Fed cattle slaughter in 1998 is expected to follow a fairly normal seasonal pattern and peak in the second and third quarters. However, slaughter is likely to decline 3 to 4 percent due to lower placements starting in the third quarter of this year and continuing through at least mid-1998. Similarly, cow slaughter is expected to decline about 12 percent following a likely 13-percent decline this year. Commercial dressed slaughter weights will reflect the sharply reduced proportion of cows in the mix and likely will return to 1994 to 1995 levels of 705-710 pounds per head.

Beef imports in April and May were characterized by large increases in shipments from Australia and New Zealand. During those months imports from Australia jumped 25 percent above January-March imports and 60 percent above imports for the same period in 1996. Although imports from New Zealand didn't expand as dramatically, April-May imports were 13 percent above a year earlier and 4 percent for the first 5 months.

After initial indications of strong demand for 90 percent chemical lean beef (90CL) from the hotel, restaurant, and institutional trade, demand declined with the early termination of a restaurant special. Despite larger than initially expected domestic 90CL supplies, reduced demand for beef in Japan increased pressure to make imported beef price-competitive in the United States. Prices for frozen imported 90CL, which normally sells at a premium to domestic fresh product, fell below the domestic price in March and remained at a discount through late July.

Imports from Canada remained strong through the first 5 months. The Canadian livestock herd entered its liquidation cycle in the beginning of the year and slaughter has increased. Canadian slaughter at federally inspected plants through the end of July was 5 percent above 1996.

Through the end of the year, the pace of meat imports could increase somewhat as Argentina becomes eligible to export product in the fourth quarter. However, Argentina is limited by a tariff rate quota of 20,000 metric tons and it is questionable whether the full level of imports can be achieved by the end of the year. Additional support for beef imports from Australia, at least in the near term, may come from the recent declines in the value of the Australian Dollar.

In addition, the lack of rain in Australia has raised concerns about forage availability and could lead to increased slaughter and exports later in the year.

Although U.S. imports could increase in the near term, increased slaughter of heifers and cows could reduce Australia's ability to rebuild its herds from the drought-reduced levels of previous years. Nonetheless, total U.S. beef imports for 1997 are expected to reach 2.44 billion pounds, about 17 percent above last year. It is expected that 1998 imports will remain at about the same level.

Exports to Mexico have been strong in recent months, but were unable to offset a slow-down in exports to Korea and continued weak demand in Japan. Burdened by large stocks and health concerns, Japan remained a relatively depressed market in the early part of the year. However, June stocks data indicate continued stock level declines and sales may improve in the second half. Any improvement in second half sales would be relative to the highly depressed level of the second-half of 1996; imports are still expected to remain below second-half 1995.

Much of the depression in import demand is also tied to consumer health and safety concerns in the wake of outbreaks of E-coli in other segments of the food sector and continued concerns over BSE. Any news that raises consumer concerns over the safety of imported products could negatively affect demand for beef.

After a fast start in the first half of the year, exports to Korea dropped off significantly in April and May. Trade in those 2 months was off 30 percent from a year earlier, almost fully offsetting first-quarter gains. Part of the decline can be attributed to the rapid fall of the won relative to the U.S. dollar. Since January the won has been about 10 percent below its 1996 average. The low point for the first half of the year occurred in April and May but the most recent information indicates that the currency remains weak.

Further pressure is being placed on imported beef in general by food safety concerns and large supplies of domestic beef. In light of record inventories and government expenditure to support prices, it is doubtful that Korea will import more that its minimum Uruguay Round commitments of 167,000 metric tons. Growth is possible in the later part of the year as demand for imported beef in restaurants increases, but continued weakness in the won could be troubling, especially if Australia can leverage its currency declines vis-a-vis the U.S. Dollar into lower prices for its product in Korea.

In Canada large slaughter and the availability of domestic beef continue to limit U.S. export opportunities. Western Canadian slaughter plants have begun focusing increased sales activities on eastern Canadian markets, traditionally sources of demand for U.S. product. Although this may have had a depressing effect on U.S. imports, it is more likely that overall supplies are more responsible for export declines. The recent strike at Cargill's High River Alberta plant (one of Canada's largest plants) lasted about 4 weeks. Although there may have been some short term disruptions in trade if Canadian cattle were shipped to the U.S. for slaughter, it is unlikely that the strike had any significant effects on Canada's meat imports.

Mexico remains the most rapidly growing market for U.S. beef. Imports for the first 5 months of 1997 were almost 80 percent over 1996. A return to more robust economic growth has encouraged increased beef consumption in Mexico and U.S. product is benefiting from increased sales to retail chains and restaurants and hotels. Additional support is also being provided by relatively low domestic production. Cattle inventories remain low following the recent drought and peso devaluation and herd rebuilding is proceeding slowly. This has benefited the U.S. through sales of both beef and cattle for slaughter. As economic growth continues, exports are expected to follow but it is unlikely that the double- digit rates of the first half will be sustained. Mexican consumers are expected to remain cost conscious, which means that imports will continue to be dominated by lower-value beef.

Given the weakness in three of the top four U.S. export markets, only slight increases are expected in 1997 exports. U.S. beef exports are expected to reach 1.9 billion pounds for the year, about 2 percent above 1996. Exports in 1998 are forecast to increase about 10 percent based on the assumption that consumers in Japan and Korea will return to consuming imported product as health concerns are assuaged.

U.S. cattle imports from Canada have fallen since the beginning of the year but were partially offset by increased imports of feeder cattle from Mexico. According to the U.S. Department of Commerce, imports of cattle weighing over 320 kilogram (primarily for slaughter) from Canada were down 21 percent through May. Through August 2, USDA's APHIS reports feeder cattle imports, from Canada into the western United States, were down almost 6 percent while slaughter cattle imports were 20 percent lower. Total imports of cattle from Canada were 19 percent lower during the same period. Based on weekly APHIS data, it appears that at least during the first two weeks of the Cargill strike, there were no large increases in movement of slaughter cattle into the U.S.

Imports of cattle from Mexico have increased over last year's highly depressed levels. Through August 9, imports of Mexican feeder cattle were 42 percent above 1996 according to APHIS reports. Mexican inventories remain low, but U.S. cattle imports from Mexico should continue climbing as feeder cattle prices increase and the Mexican calf crop expands.

Per capita beef consumption will decline from the cyclical peak of 67.7 pounds in 1996 to about 66.7 pounds in 1997 and 64.8 pounds in 1998. The larger decline in 1998 reflects an expected rise in beef exports as world supplies of both fed and processing beef begin to decline. Tight processing beef supplies in the U.S. this year, due to declining cow slaughter, has led to the largest imports since 1994. The U.S. market has been made even more attractive by the very sluggish world beef markets.

Prices for Choice beef at retail are expected to rise from the fairly static pattern of the past year, and average near $2.80 a pound in 1997. Prices are expected to reach the upper $2.80's per pound this fall, the highest since 1994. Retail Choice beef prices are expected to rise through 1998 as production declines. Larger supplies of competing meats will hold down retail prices to $2.90 to $2.95 a pound, well above the second-quarter 1997 average of $2.79 a pound.

Packer and retail margins are likely to tighten later this fall and well into 1998 as beef supplies tighten and retailers must compete against exports for market share. As world slaughter numbers begin to decline and economic expansion strengthens the demand for hides and variety meats, the by-product allowance is likely to increase following fairly sharp declines over the past year.

Fed cattle prices are expected to remain strong for the next several years, after rising about $2 per cwt to $67 in 1997. Prices are likely to average above $70 a cwt this fall and hold in the low- to mid-$70's throughout 1998. Any resumption in export demand, particularly given less competition from Australian cattle feeders due to drought, could cause prices to rise even further in 1998.

Yearling feeder cattle prices have already risen over $15 per cwt this year to about $76, and are expected to rise to near $80 in 1998. Tight grain supplies and relatively high grain prices will hold down price gains through mid-1998. Stocker-feeder calf prices have been even more explosive over the past year. Favorable fall-winter grazing conditions would help sustain price gains for stocker cattle, particularly if heifer retention increases.

Utility cow prices are expected to remain strong averaging over $37 per cwt this year, up about $7 from 1996, when herd liquidation was strong. Prices have come under some pressure in early summer as large imports and a still inconsistent processing beef demand caused prices to back toward the mid-$30's from near $40 in late July. Larger supplies of processing beef from continued disappointing feedlot cattle grading have also likely increased supplies of lean processing beef. Later this fall, when seasonal culling ends, and in 1998, when fed cattle and cow slaughter declines, prices are likely to rise another $5 per cwt to the low- to mid-$40's.

August 15, 1997 Economic Research Service

USDA, Washington, D.C.

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