Mad markets

Apr 13, 2012

Beef markets have been perplexing the past few weeks. The news of lean finely textured beef (LFTB) did have some influence on beef markets and the attitude of consumers. However, beef trade had been lackluster prior to that episode. Many market watchers have been waiting for grilling season to get underway, hoping that the seasonal trend would light up the beef markets. It appeared that we may have had our first signal last week when very good boxed beef trade volume erupted on Wednesday and Thursday. That beef trade was significant enough to push futures up near the limit Thursday and force cash fed cattle higher at the end of the week.

We have been preaching quality over the years, but at this juncture, it’s becoming hard to define what quality is. It’s a rare occurrence when the Select cutout is stronger than the Choice cutout, which it was last week by 35 cents. The Choice/Select spread has been under a dollar for quite some time. Ironically, the cow beef cutout was at $173.28 and when you compare that to the Choice fed beef cutout at $177.54, it really makes you wonder what quality is. A $4 difference between cow beef and quality fed beef just doesn’t seem to make sense. Go figure. But in the defense of quality beef, the Prime cutout was at $236. Nonetheless, I have never seen beef markets this confused relating to the valuing of quality beef.

This next cattle on feed report for March is expected to show feeder cattle placements down around 10 percent from last March. The first thing that comes to mind is, are we starting to run out of cattle? But we never run out of cattle. The other question is have cattle feeders had enough of paying high prices for feeder cattle? That would seem more likely since they don’t seem to be able to project a positive breakeven for months.

Beef prices have been struggling over the past few months. The Choice cutout had declined some $20 since the start of the year. Packers have done what they usually do when they have negative margins, slow down beef production chains. But that hasn’t been working very well since the cutout continues to slide downward.

The only good news I can see right now is that live cash fed cattle are trading positive to the board, which tells me the speculators aren’t having their way with the futures markets right now. Even though I’m sure that cattle feeders would love to have some cover on cattle placed in recent months, futures markets have been considered over sold by many analysts.

We have some strange times in the cattle markets and something is going to change. Right now, packers are losing a good $100 per head and feeders are in the same boat. I’m sure they both would like to do something about it. Consumer demand will put pressure on packers, and that will pressure feeders, taking the feeder cattle market lower. Can cattle feeders logically chase these feeder cattle at these prices just to keep their lots filled? I would have to think that they may be getting a little tired of it. We do know that the small farmer feeders are doing away with their feeding operations and focusing their efforts on more lucrative farming activities.

There has been a lot of speculation that the cattle feeding industry, with 14 million head of feeding capacity, will have to adjust to the supply of feeder cattle. Beef packers also have too much production capacity and may have to adjust to the volume of cattle they can process.

This means closing a plant or two. It’s very likely that the U.S. cattle industry will never need 14 million head of feeding capacity again. The demand for feeder cattle has been out of control with cattle feeders competing for feeder cattle to fill that capacity.

I’m hoping that the market action this last week marks the end of the beef sales doldrums we’ve been in. We’ll keep an eye on slaughter numbers to see if it’s real. Packers bought a lot of cattle last week, so next week’s slaughter should be higher. But we’re in a critical time for beef demand and the next few weeks will be interesting, to say the least. — PETE CROW