Infrastructure casualty

Opinion
Jan 18, 2013

Beef sales for 2013 have started off with a big thud; consumer demand is fading in the shadow of less expensive pork and poultry. Competing with those meats in the grocery store will be a big challenge for the beef industry this year. Most market watchers were looking for the beef cutout values to get much closer to $2 by now. For the first couple weeks of 2013, beef production is down 12.1 percent over last year, which was down 9.8 percent for the same time period.

 

Now, I’m getting a little concerned about boxed beef prices and the volume of trade. Cattle feeders should be in pretty good shape, but a backlog of market-ready cattle could become an issue. Packers have been cutting production in an attempt to elevate wholesale beef prices, processing only 624,000 head two weeks ago and about the same last week. But boxed beef cutout prices just haven’t moved that much since the New Year. The Select beef has had a nice little advance moving up to $1.86 which has narrowed the Choice/Select spread to around $7.50.

Futures markets are struggling with the February contract trading roughly $8 lower since the first of the year. February was trading limit down, $3 last Thursday but recovered $1.10 in the afternoon to trade at $126.60. The April contract was down to $130.87 Thursday, but just a few weeks ago it was trading at $138. The deferred contracts have lost much of their value over the past few weeks. Most cash trade was at $124-125 last week with most of the trade finished for the week on Wednesday. Cash trade was at a $4 discount to the board, a fairly dramatic decline since the first of the year. But, then again, the first quarter is typically the slowest time for beef sales.

The upcoming Jan. 1 Cattle on Feed report is expected to break the trend of lower placements. Early forecasts are for placements to be up 4.3 percent, marketings down 8 percent with one less marketing day in December, and cattle on feed down 5 percent from a year ago December. Wheat grass cattle will be on their way to the feedlots at much lighter weights than normal. Supplies of finished cattle appear to be in good order going into the lean winter marketing months. Cash trade along with a distorted futures market has produced around a $4 negative basis for cattle feeders and could be discouraging them to market cattle aggressively.

Andy Gottschalk at Hedgersedge.com said that the weak basis will have producers deferring as many marketings as possible into February. “This action will continue to limit the near term downslide, but will ultimately limit the upside. Cattle that are not sold on a timely basis add weight and limit future gains. The supply of fed cattle projects to gradually decline throughout the first half of this year provided orderly marketings are maintained. The tightest supplies of fed cattle should be realized during the second quarter of this year,” he said. Gottschalk is forecasting an average annual price for fed cattle in 2013 to be $130.

Although low cattle numbers are starting to hit home, the first casualty came about last week when Cargill Meat Solutions announced that they will idle their Plainview, TX, beef packing plant. In a news release, John Keating, president of Cargill Beef, said, “The decision to idle our Plainview beef processing plant was a difficult and painful one to make and was made only after we conducted an exhaustive analysis of the regional cattle supply and processing capacity situation in North America.”

They said their 2,000 employees at the plant will receive assistance from Cargill in either finding jobs at other Cargill operations within the company or finding jobs with other business in the area.

It sounds like this may be more than just a temporary closing of a plant, based on their employee plans; it sounds like an outright closure of a plant which may not come back.

This has been a huge concern within the beef industry. Declining cattle numbers, which has been compounded by ongoing drought, has wreaked havoc on the size of the U.S. cattle herd; we’ll know more the end of January when the annual cattle numbers are revealed by USDA.

With feed prices as they are and the Southern Plains cattle feeders at a disadvantage to Corn Belt feeders, it was clear that it was only a matter of time before the industry would start losing infrastructure. This cow herd must grow so the industry can use resources efficiently or we may lose more infrastructure. Cow/calf producers have never had better market signals to expand, but we still need Mother Nature to do her part. — PETE CROW

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