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Friday, January 17, 2014

An extraordinary market

by Pete Crow - Publisher

After months of reduced feedlot placements, the decline in fed cattle production and beef supplies is finally coming home to roost. Live cattle prices reached a new all-time high last week with the bulk of fed steers trading at $140 to $141, and some cleanup trade as high as $145 live. Ironically, many market watchers expected to see some of this market-topping action during a storm market. But this happened after the seasonal Christmas rally and no other unusual factors, other than we’re simply short of fed beef supplies.

The beef markets have been stellar with the Choice cutout moving up to $228.79 Thursday afternoon, advancing $14 in just one week. The Select cutout is strong, as well, at $225.51. This recent rally put the Select beef over $200 for the first time in history.

Packers have been struggling to keep processing margins in check and have been hardpressed to keep enough cattle around them to fulfill out-front orders. This was one of those weeks when they got trapped and simply had to buy cattle regardless of price. It’s been difficult to keep processing lines operating at efficient levels. Packers have been processing less than 600,000 head a week for the past four to five weeks and it appears that the cattle simply aren’t there.

According to Steve Meyer with the Daily Livestock report, “The fact that we have less product shouldn’t be a surprise to anyone.”

Starting in June, placements into feedlots were 4.6 percent smaller than those in June, 2012, and July and August placements were both 10 percent lower than they were a year earlier, and those cattle are moving through the market now.

December steer and heifer slaughter was 2 percent below a year ago, as well. And using USDA’s daily estimates on steer and heifer slaughter, it was at 451,000 head, 4.7 percent below the same week a year ago. Also, cow slaughter was 22 percent lower last week than the same week a year ago. Meyer concluded, “While that figure should not have a direct impact on the cutout values, the fact is that at some level beef is beef and less beef is less beef.”

The lower cattle numbers have been creeping up on us for years but the industry has been able to keep production artificially high by processing more cows than normal due to the drought, thus keeping beef prices lower than they should have been. Now it appears that beef prices will reflect what they are worth.

Glenn Tonsor, Livestock Marketing Specialist at Kansas State University’s Research and Extension, said, “This is a good thing for both sides,” noting that while the prices may be construed as impeding some beef purchases at grocery store meat counters, some consumers are willing and able to buy at these prices.

Overall beef demand strength has surprised analysts, playing a key role in current cattle prices through the industry over the next few months. Beef supplies are expected to continue their decline, leading to higher retail prices as long as retail demand is consistent or improving.

The lower available supplies, by definition, mean that per capita consumption will decline. It is important to recognize this consumption reduction will not be uniform across households, adding that the amount of beef that shoppers will buy will vary by income and the overall value individual households place on beef offerings.

USDA reports the average price of choice sirloin steak at $6.80 per pound in November, 2013, while the average price for boneless pork chops was $3.95 per pound and the average price of boneless chicken breast was at $3.45.

With cattle prices moving this high, should we really be worried about our ability to compete with other meat protein? That has been the traditional talk for years, but it seems that we have left the party and entered a market of our own. Demand remains good for beef and with growing export markets that pay a premium for the product, I’m not so sure we should be concerned about how high beef prices go. — PETE CROW

 
 


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