Kay's korner

May 4, 2012

Demand needs grilling boost



How much Americans spend on beef and how much they buy is how the industry determines domestic beef demand. Because all wealth to the industry comes from consumers, demand trumps everything else. This will be especially important the next two months as supplies of market-ready cattle start to increase seasonally.

Demand has had a faltering start to the year. It was down slightly in the first quarter, versus a year ago, and was weaker still in April. One reason was that wholesale beef prices were at record high levels in late February-early March and prevented retailers from featuring beef aggressively in April and early May. Then came the media furor over lean finely textured beef. We might never know its impact on sales of ground beef, the industry’s most important product, but it can’t have been positive.

The industry was barely recovering from this body blow when USDA April 24 announced the country’s fourth BSE case. While our exports dodged the BSE bullet (only Indonesia has announced new restrictions), the case impacted the markets more than was noted in most reports. Futures traders “sold the rumor” about the case and put live cattle contracts down the limit just before USDA made its announcement. The futures, contrary to reports, did not recover much and by week’s end were lower than before news of the case. As a direct result, cattle feeders were forced to accept lower money than expected.

The June contract’s April 24 close meant it had plunged $17.28 per cwt from its contract high (based on closes) on Feb. 22. It had recovered to $114.15 by last Monday. But this was still a hefty discount to cash prices. So the question is: Will futures prices move higher or cash prices move lower as supplies of market-ready cattle increase? The answer depends on the size of steer and heifer slaughter and packers’ ability to hold wholesale beef prices stable.

That’s where demand comes in. The industry will be hoping that Americans fire up their grills, buy lots of beef products and continue to do so in June and July.

Right now, this seems to be more hope than expectation. As HedgersEdge.com analyst Andrew Gottschalk noted last week, economic uncertainty continues to weigh on consumers and the latest round of economic news did little to lift their spirits. Anemic wage growth is increasingly impacting consumers’ spending decisions. The latest consumer credit data would suggest borrowing has increased to maintain current spending levels, he says.

With retail beef prices in March 6 percent higher than last year, consumers will face record high prices this month as they use their grills. I sure hope they buy a lot of steaks. But I suspect there will be more hamburgers, pork chops and chicken on the grill than anything else. The key issue is whether beef sales are good enough for packers to raise their kills enough to take care of larger cattle supplies. If they don’t, a backlog of cattle will grow into June and even July.

As for the BSE case, two points need to be emphasized. Although it will cause only a fraction of the $2.5 billion to $3.1 billion in annual losses suffered after the first case in December 2003, there is a cost that the industry can ill-afford. One is the loss I mentioned earlier in declining cattle prices. The other is lost export sales. Any bans, however small, will cost the industry. More important, the case will delay a Japanese decision to lift its ban on U.S. beef from cattle over 20 months of age. It will also delay a decision by China to start accepting U.S. beef gain. It has had its ban in place since the first BSE case. Neither country will act until USDA issues its final epidemiological report on the case.

The other point is that the case involved atypical BSE. This is the term given to cases that occur spontaneously or sporadically, with no evident link to contaminated feed. The previous two cases were also atypical and the first case involved a Canadian-born dairy cow. This means that the U.S. has never had a home-grown case of classical BSE, which can be traced to contaminated feed. One can conclude that the U.S.’ feed ban has been remarkably effective.

Atypical BSE cases are exceptionally rare. There have been only 60 cases out of 180,000 BSE cases worldwide. Atypical cases appear to be completely random. Scientists have found no link or commonality between any of the cases. This suggests it might never be discovered what causes atypical BSE. It also suggests that such cases will continue to occur in the U.S. and elsewhere, and that there is no point in enhancing current BSE safeguards. — Steve Kay (Steve Kay is Editor/ Publisher of Cattle Buyers Weekly.)