Mar 27, 2009

Hope in markets
There is only one way to phrase the nature of the congressional aggression over the AIG bonus situation last week: “out of control.” The House of Representatives voted to pass a targeted tax on AIG employees who received bonuses. But it didn’t appear that the Senate wanted anything to do with the issue. This Congress has shown little respect for the free market system and even less respect for the U.S. constitution. The show will continue and to say the least, it’s entertaining.

Cattle markets had a nice little rally going last week and it looked like feedlots would be able to add a couple bucks to fed cattle. The relationship with the stock market is uncanny. While the stock market was advancing, so was corn, feeder cattle and fed cattle.

There was a huge fire sale two weeks ago when packers sold over 500 loads of beef cuts and grind. It, however, took the Choice/Select spread into negative territory. I honestly don’t know if I have ever seen the price of Choice beef below that of Select, a whopping 18 cents lower.

Demand for Select appears to be stable, but when cattle feeders are producing 66 percent Choice product, you would expect a problem. The ironic part of the issue is that cattle are not on feed much longer than a year ago. Choice/Select spreads are at their widest when 51-53 percent of the cattle processed are grading Choice. It’s a supply thing.

Cattle feeders have had extremely good feeding conditions over the winter and cattle have performed at their best levels ever. With cattle gaining so well and processing at fairly low levels, it would make one think that there is going to be some point of supply compression, cattle done too early and processed too late. But market analysts say the marketing rate on fed cattle is rather good. Glen Grimes at University of Missouri said that beef demand is up 3.4 percent from a year ago, which is surprising given fed cattle prices and the boxed beef cutout. Perhaps consumers cut back on meat purchases more than a year ago. The last cattle on feed report was a little better than market analysts had expected and we’re still 5.3 percent below a year ago in inventory, while placements were down 2.6 percent from last year. Marketings were down 5.3 percent from last year, but with one less processing day, which puts the marketing level just about steady with last year. The upside is that supplies are still on the low end of the spectrum and that should bode well going into the summer, which generally brings higher demand for beef. Supplies of beef are expected to be even lower than a year ago. Demand still is the key to improved cattle values.

According to Andy Gottschalk at HedgersEdge. com, the supply of cattle on feed for more than 120 days is currently 10 percent lower than a year ago and they expect that number to fall to 17 percent lower than a year ago in July. This projection assumes that cattle marketing will be consistent with a year ago. Demand is almost impossible to measure and only assumptions can be made. I spoke with Charlie McVean at McVean Trading and he suggests that the Obama economic stimulus measures will provide lower to middle income families extra income, roughly 9 percent greater than a year ago. McVean expects to see some of that extra disposable income spent on beef, which will have a positive effect on beef demand.

We know beef supplies are going to be lower than a year ago and we have some positive things happening in the consumer demand arena. How much better could fed cattle prices be? Gottschalk said he would consider cash trade over $84 a major trend reversal.

As far as feeder cattle are concerned, Gottschalk thinks it will have more to do with feeders’ ability to get credit. There has been a $200 loss per head on fed cattle, which amounts to about $4 billion when you account for all of 2008. This could limit their ability to purchase feeder cattle this year. However, Gottschalk says that recent actions by the Federal Reserve to free up credit is like using a sledge hammer to open a pecan and it should provide liquidity in credit markets during the second half of the year. There are some positive situations which are likely to allow the beef industry to gain some ground.

Supplies are in line and should be shrinking into summer. Improving credit markets and cash in consumers’ pockets on the demand side present a more positive perspective for beef producers. — PETE CROW