When I think of Greece, I think of lamb, from kebabs to kleftiko.I don’t think of beef because the country produces only 56,000 metric tons (MT) of beef per year. Yet Greece is currently having a big impact on the U.S., the largest beef producer in the world (12.105 million MT in 2009).
Greece’s debt crisis and that of several other European Union countries, and their impact on the euro, have investors around the world on edge. This nervousness turned to near panic three weeks ago and U.S. stocks plunged. The Dow fell again the week before Memorial Day before recovering. Meanwhile, the U.S. dollar strengthened against the weakening euro and other currencies, which makes U.S. meat more expensive to global buyers.
The market jitters dealt a sharp blow to the live cattle and wholesale beef markets the last two weeks of May. This was a reminder that outside markets, not supply and demand, are the greatest risk going forward. As the Dow fell, live cattle futures fell. The June contract from May 11 to May 25 dropped 678 points, mostly because of concerns about Europe. In turn, cattle feeders sold cattle sharply lower.
Live cattle prices, basis western Kansas, fell from their spring high of $100 per cwt. to $93 last week. Cattle feeders were also motivated to sell because they have positive margins, because of a favorable basis, and because they want to remain current in their marketings as supplies increase into the summer.
The big concern going forward is that speculative traders, who had heavily bought live cattle futures, might bail out of live cattle big time. Some are already being forced out by margin requirements while others are starting to park their money somewhere more secure, like in gold or U.S. Treasury bonds. Since topping on May 11 at 377,000 contracts, open interest in live cattle futures has fallen 7 percent.
Yet the futures are underpinned by the healthiest fundamentals in some years. Supplies of marketready cattle remain tight, in part because overall cattle slaughter is up 1.5 percent on last year. They look manageable through the summer and will tighten late year and into 2011.
Beef demand is starting to recover, notably at the restaurant level. Prices in key export markets have rebounded from last year’s depressed levels. They look set to go higher because of shrinking global beef supplies, although a stronger dollar might crimp U.S. sales. If only the beef industry could persuade investors that it is a safe haven for their money.
Wholesale beef prices have suffered the same fate as cattle prices. After putting in a daily top of $171.40 per cwt. on May 11, the Choice cutout had fallen to $163.57 by last Wednesday. Cutout values will continue to decline in June because that’s what they do seasonally. Values normally fall about 10 percent from their spring high to summer low, which means a Choice cutout low of $153.64. They might go lower than this if turmoil remains in the outside markets. Conversely, signs of stability in Europe and tighter overall beef supplies (production plus imports minus exports) might limit the decline. That’s what appeared to occur last week as live cattle futures rallied Wednesday and cattle sold in Kansas $1 per cwt. higher than the previous week. But cutout values continued their decline after Memorial Day holiday beef sales were described as only average.
The demand concern going forward is that high wholesale beef prices this spring will likely hurt retail sales this summer. Retailers have been careful about not raising prices so much as to give their customers sticker shock. The All-Beef price in April averaged $4.03 per pound, up 1.8 percent from March and up 2.5 percent from a year earlier. But it was higher in May and will be higher again in June. The All-Beef price is expected to surpass its old record of $4.11 this summer. A reduction in beef featuring will have even more impact on sales. Retailers have been featuring ground beef heavily, but that’s likely to end because of the high spring wholesale prices.
Higher retail prices are likely to hurt sales for two reasons. First, consumers are still cautious in their food spending. Second, beef is becoming less competitive with pork and chicken. The April All-Beef price was $1 per pound above pork and $2.38 above broilers. That’s a bigger differential than a year earlier and the gap will widen in June. Consumers will continue to purchase protein based on absolute price rather than relative value. Retailers will feature chicken more and consumers will buy more. That’s what faces the beef complex this summer. — 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.)