Dec 9, 2011
No place for speculators

It looks like we may have popped the holiday beef bubble this last week. Cattle markets were roaring hot two weeks ago when fed cattle traded as high as $128 live and $208 dressed. Now, the buying interest is about $3-5 lower for last week. Cattle feeders certainly had to do well on those transactions. Packers, on the other hand, were taking a licking, losing $90 on each animal they processed. Slaughter levels will slow down going into Christmas.

Consumer demand is the key to maintaining these prices. With reported unemployment down a few points, let’s hope those folks with new jobs are going out and celebrating with a nice, thick, juicy steak. Retail beef prices are much higher than a year ago and retailers have yet to pass the full cost of $125 cattle on to their customers. The beef cutout will need to be over $200 for the beef industry to have any sustainability; the cutout is currently $190, off about $6 from the week prior.

It seemed like retailers got cold feet with this new cutout level and have backed off a little bit, but pork and poultry are the more attractive featuring products in grocers’ meat cases. Ironically the best cuts of beef are still quite affordable to beef lovers. I was in Sam’s Club, where I buy my beef, picking out a few items for the Christmas season. To my surprise, top loin strip steaks were only $1 higher than the last time I bought them. Boneless rib steaks were about $2 higher than they were in September; I was shocked to see short ribs priced at $5.50 a pound.

It seems the end meats are going higher and faster, relative to the middle meats. Nearly all the lesser cuts have shown price increases beyond what the middle meats could achieve. I suppose you could say the Cattlemen’s Beef Board muscle profiling work has produced enough new cuts that are adding value to the overall carcass.

The rains finally came to the southern Plains and the wheat grass is starting to come along well enough to put some steers out. And they did: the calf markets in the southern Plains have gone much higher with 4 and 5 weight calves trading up to $200 a pound and higher. We have heard reports that ranches on the Gulf are looking for females.

Corn markets have been taking a beating the past two weeks with the December contract drifting below $6 for the first time since midsummer. It appears that USDA found some more corn during their last survey and other regions of the world are expecting better crops.

Last Monday, the Wall Street Journal (WSJ) ran a story lambasting USDA for not doing a great job on the corn forecasts, missing some reports by a half a billion bushels. Ending stocks are expected to be 840 million bushels this year, or so it seems. Darrel Good, a professor at the University of Illinois, has written extensively about USDA’s data and says that a number of recent quarterly stockpile reports have been simply incorrect. The numbers have been higher or lower than the actual amounts in storage. “Things went haywire in June and September,” he says, and added that the cumulative numbers just don’t make sense.

WSJ said, “last year, the USDA overestimated the size of the harvest in its monthly forecast by an average of 6 percent, the widest average overestimation since 1995. That year, the harvest was 750 million bushels smaller than what was forecast. Current USDA figures for this year suggest that the department overestimated the total crop by nearly 10 percent early in the season.”

In June this year, stockpiles were higher than analysts expected and corn prices, which were trading at $7 a bushel, plunged to $6.29 for the day.

It’s common to question the credibility of USDA’s inventory projections and every now and then, the respective commodity industries will raise a ruckus over the projections. The right numbers usually come out somewhere towards the end of the growing season. Or the next cattle on feed report.

But it does make it difficult to work off one set of projections and call it good. With the advent of the ethanol mandates, the corn markets have been all about volatility and for most livestock producers, it’s become a way of life. Most will buy the feed when they buy the cattle and then sell the cattle on the board and play it safe, essentially working with relative conditions to make a hedge. This is no place for speculators. — PETE CROW