Markets have a habit of confounding forecasters, and the fed cattle market has proved this so far this year. Some analysts at the start of the year believed that prices might top $130 per cwt. live, but most had their first quarter average pegged at $121 or lower. There’s still a month to go in the quarter but prices the first eight weeks averaged just over $125 (basis USDA’s 5-area steer price). Meanwhile, few forecast that wholesale beef prices from the start of the year would be sharply higher than prices in the same period last year.
Both cattle and beef prices might see a sharp correction this month, particularly as March is the weakest beef demand month of the year. That’s both bad news and good news, depending on whether you’re selling cattle or beef, or buying the latter. Live cattle prices declined somewhat the week before last after putting in what might be the top for the year at an average $129.75 live. How much of a decline occurs this month will depend on cattle feeders’ willingness to accept lower prices to accelerate their marketings.
They certainly need to do the latter. January marketings were insufficient for cattle feeders to stay current in their marketings, and that likely occurred in February. As I noted in last month’s column, packers are processing fewer cattle than expected. It was certainly a negative that the estimated slaughter total the week before last was below the same week last year and that year-to-date slaughter was up only 104,000 head on last year.
Other key data strongly suggest that cattle are not being marketed in a timely fashion. Take carcass weights: after topping out late last year a month later than normal, they have declined much slower than the seasonal norm. For the week ended Feb. 10, steer weights averaged 889 pounds, up 10 pounds from last year. Heifer weights averaged 833 pounds, up 9 pounds. Overall weights averaged 827 pounds, up 8 pounds. That’s a reason why packers have reduced their kill levels, as they are getting a lot more pounds per animal than at this time last year. Another negative is that more over-fat cattle, as expressed in the number of Yield Grade 4s and 5s, are showing up at packing plants.
In the meantime, fed cattle continue to grade a record percentage of Prime. They graded 8.12 percent Prime the week ended Feb. 16, breaking the 8.02 percent record of the week before. This was the fourth record-high percentage in the latest six reported weeks. Cattle also graded 72.44 percent Choice. The combined 80.56 percent is the second highest to the record 81.10 percent the week before that. One can reasonably assume that winter weather had no impact on performance and/or cattle are being fed too long.
With these warning lights flashing brighter every week, concerns are growing that the supply of market-ready cattle is soon to start increasing significantly, maybe by mid-month. Analysts have warned from the start of the year that market-ready supplies will increase into the summer and have the potential to overwhelm the market. This was before a bearish Cattle on Feed report issued Feb. 23 that revealed larger than expected January placements. These will add to the front-end loaded on-feed total that was 8 percent higher on Feb. 1 than last year. Such numbers and forecasts are why the June and August live cattle contracts remain $8-11 per cwt. discount to the April contract.
On the all-important demand side of the market, concerns are that high wholesale prices might hurt beef demand as the grilling season starts. USDA’s weekly comprehensive (cuts, grinds, and trim) the week before last was up 10 percent on the same week last year. The weekly Choice value was up 12 percent. The comprehensive cutout in fact has remained well above $200 every week this year, whereas it remained below that level last year until early March. The same has been true of the weekly Choice cutout.
Retailers in January slightly lowered their Choice beef prices from December to an average $5.76 per pound from $5.80 per pound. But the price was 10 cents higher than in January 2017 and was likely similarly higher in February. The higher wholesale prices, say retailers, are hampering their ability to sell as much beef as they would like and have eroded their profit margins. Putting it another way, retailers are unlikely to feature beef as aggressively as last year as the grilling season approaches. That is why sharply lower prices from now on might be good news. Because of the build-up in market-ready supplies of cattle, the industry will need retailers to sell a whole lot more beef this summer than last year. — Steve Kay
(Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707-765-1725. Kay’s Korner appears exclusively in WLJ.)
