BOZEMAN – Overall, U.S. wheat prices should continue to recover in 2002 and fed cattle prices are expected to increase, though both are still challenged by weak export markets and economic turmoil, says a Montana State University economist.

The problem in Montana is that the drought threatens what is otherwise a relatively positive outlook, says Kevin McNew, a MSU-Bozeman economist and Extension Service marketing specialist.

For wheat, says McNew, the situation is this:

Montana wheat prices inched higher in 2001 although they remained low by historical standards. Unfortunately, slightly higher prices were not enough to offset the devastating impacts of widespread drought. Montana’s 2001 wheat crop was nearly 30 percent smaller than 2000 and the lowest crop output since 1988.

U.S. wheat production was also lower for the year, as drought in Western and Southern Plains states reduced both yields and acres harvested. In 2001, total wheat production was off nearly 13 percent from the 2000 crop and the smallest crop since 1988.

With such a dramatic drop in production, many had expected wheat prices to be significantly higher than what was observed for 2001.

"A weak export environment for U.S. wheat was the primary contributing factor to lower-than-expected wheat prices for much of the year, largely because of significantly higher production in the former Soviet Union countries," says McNew. U.S. wheat exports for 2001 were the lowest in nearly 15 years. Between 2000 and 2001, wheat output from the former Soviet Union countries increased nearly 50 percent while their export volume doubled in this same time period.

For 2002, the wheat price outlook should improve, says McNew. Poor crop conditions in the Southern Plains states this fall and winter have left the winter wheat crop there vulnerable to sub-par yields. Overall U.S. wheat acres are likely to be at or only slightly higher than 2001. As a result, U.S. wheat production will likely be similar in size to the small crop of 2001.

On the export front, several factors are evolving that could bring better export business for U.S. wheat, most prominent being the entry of China into the World Trade Organization.

"This helps U.S. grain markets on two fronts," says McNew. "First, China won't be able to provide high price subsidies to its farmers, a practice it has encouraged since production shortfalls in 1996 when grain prices spiked around the world. Second, as part of its trade agreement, China will have to lower import tariffs and reduce its export subsidies, setting the stage for better access from U.S. grain markets and less competition from China in world markets."

Although the impacts of China’s WTO entry may take time to unfold, it is clear that U.S. grain trade, and especially wheat, should benefit from this development.

A second international factor is the political turmoil in Argentina, a country with significant wheat production and exports. The destabilization of this country’s economy has led to at least a temporary stoppage in wheat exports. While it is unclear how this development will unfold, there is the potential for the United States to gain access to other wheat markets, especially Brazil, if the problem persists.

Overall, U.S. wheat prices should continue to recover in 2002 on the basis of better exports and steady production.

For cattle, the outlook also looks good, says McNew.

By all indications, 2001 was going to be a banner year in the cattle market with prices expected to reach record-high levels on the basis of strong demand and tight supplies. Although prices did remain strong for much of the year, deteriorating macroeconomic conditions worldwide and the added uncertainty resulting from the terrorist attacks on the U.S. created concerns about domestic and international beef demand.

In Montana, 2001 steer and heifer prices were record-high, surpassing the last record-high in 2000 by nearly 3 percent. Even so, the prolonged drought took a toll on forage availability and pasture conditions, leaving many Montana ranchers faced with either high feed costs or liquidating their cattle inventories.

Drought in Montana and other Western and Southern Plains states in the past year has had important short-run impacts on the cattle market by forcing many livestock producers to liquidate inventories and place retention heifers into feedlots. The long-run impacts are positive, because fewer heifers means a continued decline in future cattle inventory. But the short-run result meant increased beef supplies hitting the market, the full brunt of which was felt in the fourth quarter of 2001.

At the same time that this burdensome beef supply was coming to market, domestic and international economic conditions began to unravel and prospects for strong beef demand dimmed.

In 2002, cattle markets should remain volatile, says McNew, but the outlook looks promising. U.S. cow-calf operations have not begun the process of holding back heifers for their breeding herds. If normal weather patterns re-emerge this year, the process of holding back heifers will begin with 2002 born calves.

High fed-cattle prices next year will not necessarily translate into higher profits for feedlots due to cyclically high feeder cattle prices.

If feeder cattle prices moderate some this fall, the best chances for profits may be for closeouts in March-June. Cow-calf producer profits are forecast to continue to increase in 2002 and 2003.

U.S. beef demand is the major uncertainty for 2002, says McNew. Income growth has driven most of the year-to-year increase in U.S. consumer beef demand in recent years. Both fiscal and monetary policies are now being used to stimulate the economy. A key for beef and cattle markets will be when the U.S. economy starts to grow again.

A significant shortfall in U.S. corn production remains a major longer-term risk for U.S. livestock and poultry producers. Due to low prices in recent years, U.S. corn acreage planted in 2001 was the lowest since 1995. Although corn and feed prices are expected to remain low by historical standards, the risk of higher prices remains if acreage or yields turn lower in 2002. An increase in corn prices by 10 cents per bushel from the previous year would tend to decrease 500- to 600-pound steer calf prices by $1 per hundredweight.

Besides feedstuff uncertainty, other factors will influence cattle prices, says McNew. Both U.S. pork and poultry production will likely be record high for the next two years. Per capita, U.S. total meat and poultry consumption declined two to three pounds in 2001. This is likely to increase about one pound per person in 2002 with declining U.S. beef consumption being offset by more pork and poultry.

U.S. beef exports in 2002 are expected to remain on the defensive. In fact, modest year-to-year declines are forecast for U.S. beef exports in 2002 and 2003. The preliminary forecast for U.S. beef exports in 2003 is just over 1.9 billion pounds (carcass weight basis). That would be the lowest U.S. beef export tonnage since 1996. U.S. imports of beef from Canada may increase if Asian demand for beef continues to moderate.

Even though beef production will likely decline, fed cattle prices in the first quarter of 2002 may be down 3 to 5 percent from 2001. Fed cattle prices in early 2001 were bolstered by harsh winter conditions in feedlots. Further, lower beef demand and by-product values are expected to reduce prices below those in 2001. However, during the last three quarters of 2002 fed cattle prices are forecast to average above the 2001 level. Year-to-year increases in fed cattle prices could be 5 to 10 percent in the second half of 2002 if, as currently forecast, the U.S. economy climbs out of recession. For the year, fed cattle prices are forecast to average in the upper $70s per hundredweight, 3 to 4 percent above the prices in 2001.