A lot of time has been spent by a lot of people analyzing the seasonal patterns for cattle prices. Studies of the spring highs and the summer lows keep market participants guessing and the forecasters predicting, but observers note, with little success from either party.
Last week’s decline in fed prices was a reminder of how vulnerable the market can be to weakness in price. Those who believed the market would hang in the high teens/low $120s for the balance of the year are now looking at a price level that could find prices $5 under last year by this week and closeouts deep in the red soon after.
The industry as a whole is much more protected this year with many—fearing a decline from increasing numbers of cattle on feed—are short the board. It is likely over half of the live segment of the industry is fully hedged, leaving the balance divided between partially hedged and some who are open. Breakevens are working higher from this point forward and many of the cattle to close for the balance of the year have breakevens from $115-125—a far cry from the $107 posted on the October live cattle contract.
The question on all minds is how low can it go? The answer will rest with two primary factors—carcass weights and beef demand. Carcass weights are currently 8 lbs. under last year but rising faster than last year and are expected to match last year’s record number soon. Total beef tonnage is key to maintaining the important supply/demand balance. Cow slaughter is up (+10 percent) and expected to remain above last year. Continued declines in cattle prices will certainly encourage more cow culling this fall.
Beef demand has been good all year. Exports have exceeded prior year’s numbers throughout the year but warning signs are on the horizon. The U.S. producers refuse to support National ID and this costs us foreign sales every day. Japan, our largest trading partner, has increased tariffs. Imports are likely to increase as Australia rebuilds its herd following a drought. Domestically, unemployment is down and people are actively buying beef and protein is increasingly popular in the diet.
Beef packers are positioned to get more than their fair share of the margins available to beef production because slaughter capacity is currently quite low when compared to the increasing size of the herd. The industry needs to see a new beef plant or the reopening of an old beef plant. Competition will help keep margins across all sectors in line.
Finally, the CME will play a role in price and production. Premium deferred cattle contracts will cause more holding at the feedyard level hoping for a better basis and taking cattle to heavier weights. Discounted futures serve the opposite effect. It will encourage earlier marketings. October will soon become the spot month and is trading $8 under this week’s cash—a good reason to pull sales forward. — AgCenter
