When the U.S. border was sealed off from accepting any Canadian beef (May 20-Aug. 8) the potenial impact on U.S. cattle and hog prices would be dramatic.

"The Canadian situation contributed to record high cattle prices and premiums over hogs," says Chris Hurt, Purdue University agricultural economist. The U.S. cattle industry and Canadian beef consumers have been the primary beneficiaries of this one-cow event. The losers have been the Canadian cattle industry, U.S. beef consumers, and U.S. pork producers.

Live cattle futures reached a milestone in late August as prices reached $84.90, passing the previous record high of $84.30 reached in March 1993. 

"On the other hand, hog prices are much lower," Hurt noteds  "The daily high (in late August) of the nearby live-hog futures price, when converted to a liveweight, was $40.77...Live cattle futures were trading at a $44.13 per hundredweight premium over the approximate equivalent live-hog futures."

Cash cattle prices also are setting records relative to cash hog prices. In the first eight months of this year, cash steer prices have averaged $38 higher than cash hog prices (live equivalent, 51 percent to 52 percent lean hogs.) The previous record annual cattle premium was $33 per hundredweight in 1992. Hurt points out that premiums of cattle prices over hog prices have been trending upward for several decades.

What is contributing to this? "First, wide swings in price relationships of cattle and hogs are not new. But three factors stand out," says Hurt. "Perhaps the most dominant factor causing price variability is the changing supply across the production cycle." The beef production cycle tends to be about 10 to 12 years long. However, the current cycle is now up to 14 years, and is at its low production point.

The pork production cycle, however, tends to be about 3.5 to four years long. "We are in a mild liquidation phase of the cycle, yet pork production has just barely begun to come down," notes Hurt. "Thus, cattle production is at 'low tide' and hog production is still fairly close to 'high tide.' Separate production cycles of widely different length cause large fluctuations in relative prices over time."

The second point covers a range of topics. Many argue that the pork industry's "industrialized" nature has reduced costs, narrowed profit margins and resulted in an industry that is slow to make downward adjustments in supply. In addition, beef demand seems to have improved in recent years while pork demand has held steady. Each of these contribute to higher cattle prices relative to hog prices, says Hurt.

"Finally, this year's cattle price premiums are clearly related to the closing of the Canadian border to beef shipments due to the BSE-positive cow," he adds.

U.S. cattle supplies were sharply curtailed this summer– in 2002, more than 8 percent of the beef supply had Canadian origins. More than half of that came as live cattle, with the rest as processed beef. Of course after May 20, the Canadian cattle or beef entering the United States dropped to zero.

Meanwhile, the U.S. border remained open to Canadian hogs an pork. The only outlet for Canadian beef this summer has been the Canadian consumer, which displaced pork consumption. "For processed pork, June imports from Canada increased by 13 percent over May. The flow of live animals also has increased," says Hurt. Canadian market hog made up 1.5 percent of U.S. slaughter in early May, but expanded to 3 percent by mid-August. Last year, Canadian feeder pigs and market hogs represented 5.7 percent of U.S. slaughter. As of August this year, the rate exceeded 8 percent.

Purdue University