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- CRB Fundamentals - 2008 Commodity Articles

Cattle and Calves

The beef cycle begins with the cow-calf operation, which breeds the new calves. Most ranchers breed their herds of cows in summer, thus producing the new crop of calves in spring (the gestation period is about nine months). This allows the calves to be born during the milder weather of spring and provides the calves with ample forage through the summer and early autumn. The calves are weaned from the mother after 6-8 months and most are then moved into the "stocker" operation. The calves usually spend 6-10 months in the stocker operation, growing to near full-sized by foraging for summer grass or winter wheat. When the cattle reach 600-800 pounds, they are typically sent to a feedlot and become "feeder cattle." In the feedlot, the cattle are fed a special food mix to encourage rapid weight gain. The mix includes grain (corn, milo, or wheat), a protein supplement (soybean, cottonseed, or linseed meal), and roughage (alfalfa, silage, prairie hay, or an agricultural by-product such as sugar beet pulp). The animal is considered "finished" when it reaches full weight and is ready for slaughter, typically at around 1,200 pounds, which produces a dressed carcass of around 745 pounds. After reaching full weight, the cattle are sold for slaughter to a meat packing plant. Futures and options on live cattle and feeder cattle are traded at the Chicago Mercantile Exchange. Both the live and feeder cattle futures contracts trade in terms of cents per pound.

Prices - Live cattle futures prices rallied in the first half of 2007 to a 4-year high but then dropped 12% into mid-2007 on a weakening U.S. economy, finally recovering into the end of the year. Cattle prices finally closed 2007 up +6.2% y/y at 96.25 cents per pound. Cattle prices rose in early 2007 as U.S. beef exports to Asia surged. Beef sales to Japan rose more than four-fold y/y after Japanese restrictions on U.S. beef were lifted. Sales to South Korea also rose as that country lifted its U.S. beef import ban, which was instituted due to former mad cow disease concerns. The surge in feed costs due to record high grain prices was initially bearish as cattle ranchers balked at the high feed costs and brought their animals to slaughter earlier than normal. However, the surge in feed costs will eventually be bullish for cattle prices due to smaller herds and lighter cattle weights. Cattle prices remain capped by concern that a slowing U.S. economy will reduce domestic beef consumption as consumers switch to less expensive pork and chicken.

Supply - The world cattle and buffalo figures showed a small +1.0% increase in 2007 (as of Jan 1, 2007) to 1.004 billion head, which is just slightly above the 3-decade low of 935 million head seen in 1995. As of January 1, 2007 there were 97.003 million cattle and calves on U.S. farms, up +1.3% yr/yr and slightly above 94.888 million in 2004, which was the lowest level since 1959. World production of beef and veal in 2007 rose +1.4% to 54.489 million metric tons (carcass weight equivalent) and USDA is forecasting a further rise of +0.1% to 54.551 million metric tons in 2007. U.S. commercial production of beef in 2007 rose +0.7% to 26.345 billion pounds but the USDA is forecasting a drop of 1.3% to 26.000 billion pounds in 2008.

Demand - World consumption of beef and veal in 2007 rose +1.2% to 52.540 million metric tons and the USDA is forecasting a drop of 0.5% in 2008 to 52.291 million metric tons. U.S. consumption of beef and veal in 2007 fell 0.15% to 12.815 million metric tons and the USDA is forecasting a further drop of 1.1% in 2008 to 12.675 million metric tons.

Trade - U.S. imports of live cattle in 2006 (latest data available) rose by +14.2% to 2.073 million head, recovering from the low levels seen when mad cow disease caused the U.S. to close the Canadian border to live cattle in 2003. U.S. exports of live cattle in 2006 rose by +107.7% yr/yr to 43,948 head, up sharply from the multi-decade low of 21,155 in 2005 caused by to cattle trading bans by key U.S. trading partners.

By weight, U.S. imports of beef in 2007 rose +3.0% to 3.178 billion pounds but the USDA is forecasting an increase of +6.4% to 3.380 billion pounds in 2008. U.S. exports of beef in 2007 rose by +24.5% to 1.436 billion pounds and the USDA is forecasting a further rise of +19.1% to 1.710 billion pounds in 2008. That, however, remains far below the levels of about 2.5 billion pounds seen before mad cow disease hit in December 2003 and largely shut down U.S. beef exports.

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