Smaller livestock numbers ahead. (Marketing To Livestock/Dairy Producers).

This has been a difficult year for the livestock sector of the farm economy. Livestock prices have been down significantly compared to year-earlier levels and, in many cases producers have experienced negative margins. And, at least for the near term, these difficult conditions will probably continue.

BEEF PRODUCTION

The current liquidation phase of the cattle cycle is in its seventh year--one of the longest cycles on record. But beef production is actually up significantly this year, due in large part to higher dressed weights. Cattle weights have been increasing for years, but the increases have been especially large in the last couple of years. Through the first half of this year, cattle dressed weights are almost 30 pounds heavier than in 2001. This results in a 4 percent increase in beef production with essentially no increase in slaughter.

With feeder cattle and calf prices down more than 10 percent year-over-year, a reversal in the down-trend in cattle numbers was unlikely this year. However, the potential for an increase in cattle numbers was further dimmed by the widespread drought covering much of the country this year. Pasture and range conditions are extremely poor, especially in the western half of the country where more than half of the pasture and rangeland is rated poor or very poor. This is forcing producers to cull their herds even further, virtually assuring that cattle inventories will continue to decline for at least one more year.

PORK PRODUCTION

Hog prices have been even more disappointing this year. Through the first half of the year, hog prices are down more than 20 percent compared to the same period in 2001. The reasons for such a steep price decline are not readily apparent. Pork production during that same period was up about 4 percent, fueled by a 2 percent increase in slaughter and a similar increase in dressed weights.

But the bulge in pork production may be easing. According to USDA's Hogs and Pigs report, the year-to-year increase in slaughter should decline as we move into the fall months, and the increase in dressed weights has already narrowed. Still, hog numbers will remain higher than in 2001, and the number slaughtered will be augmented by an influx of hogs from Canada. The combination suggests little if any real improvement in hog prices in the second half of the year and the potential for below-break even prices remains very large for the fourth quarter of this year.

Things may not get much better for hog producers in 2003. At least according to the farrowing intentions, the pig crops will continue to be above last year's levels through the end of this year. The weakening of the dollar may help reduce the flow of Canadian pigs across the border, but the relatively large supply of U.S. hogs will continue to be augmented by imported hogs.

STRUGGLING MARKETS

One factor hurting all livestock markets is an ongoing dispute with Russia over poultry trade. Early this year, Russia imposed a ban on poultry imports from the U.S. As Russia is by far our largest customer, the impact has been significant. Talks aimed at resolving the problem have been going on for months, and while the ban officially has been lifted, trade is still blocked. Because of these trade problems, U.S. poultry exports may decline by as much as one billion pounds this year, and this extra meat will back up into domestic markets. The problem is further exacerbated by an expected decline in pork exports. Last year, pork exports soared due in part to disease problems in Europe. This year's sales will decline to more "normal" levels.

Milk prices have also plunged this year, following a very profitable year in 2001. Milk cow numbers are rising and productivity gains are also strong. The increase in milk production is being met with relatively soft demand and milk prices have dropped sharply. Acquiring the forage needed will be an increasing problem for dairy producers, especially in the West. This will likely convince producers to rethink expansion plans in the next few months.

The problems in the livestock sector will have implications for the industry as a whole. Livestock cash receipts could easily decline by $5 billion to $7 billion compared to 2001 levels, contributing to a significant decline in net cash farm income. The financial squeeze that livestock producers have faced through the first half of 2002 will almost certainly worsen as a result of stronger crop prices. This should set the stage for even smaller livestock numbers, at least by the second half of 2003.

Rich Pottorff is chief economist with Donne Agricultural Services Co., St. Louis.