Beef demand is still the key

News
Jul 27, 2012

The continued worsening of the drought has cattle markets on the defensive in just about every respect. Loss of forage and reduced hay production is causing early feeder cattle sales and additional cow culling.

The signs of additional beef herd liquidation are everywhere; the midyear total cattle inventory is down 2 percent while the beef cow herd is down 3 percent. Though beef cow slaughter is down over 9 percent from last year, cow culling still exceeds heifer placement and the herd continues to decline.

The July 1 beef heifer inventory is just even with last year, which indicates no significant expansion and the replacement heifers may yet be liquidated if the drought worsens. The July Cattle on Feed report included a scant 2 percent decrease in placements in June, which is really a 2.8 percent increase in placements when adjusted for the one less business day this June. Placements of cattle less than 600 pounds were equal to last year’s droughtenhanced level and suggests more droughtforced placements this year.

The market price impacts of this year’s drought have developed much more quickly and have been much more severe this year compared to last. Partly that is because of a more widespread drought with fewer regional options, partly because of the dramatic impacts of the drought on corn prices, but also because of significant erosion in beef values in the past month. Choice boxed beef decreased 8 percent in the past month, led by a nearly 17 percent drop in wholesale ribeye prices and an 11 percent drop in wholesale loin values. A weaker U.S. macroeconomic outlook combined with weaker beef exports is contributing to persistent sluggish growth in beef demand.

Notwithstanding the impact of the drought on the timing of cattle sales and on corn prices, it should be remembered that beef supply fundamentals remain tight. This should help limit drought impacts now and increase price recovery prospects later. Of course it depends on how long the drought remains and how severe conditions get.

The estimated 2012 calf crop is down 2 percent and July 1 estimated feeder supplies are down 3.2 percent from last year.

At some point after the worst of the drought impacts pass, tight supplies will push cattle prices back higher; but it all depends on beef demand. The extent to which high corn prices will limit feeder cattle prices in the coming months will depend on beef demand and its impact on fed cattle prices. Right now it is the drought that dominates cattle markets but later it will be beef demand, both domestic and international, that will be the key to cattle prices. —

Derrell S. Peel, Oklahoma State University Extension Livestock Marketing Specialist

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