Kay's Korner

May 31, 2013

Raining on the beef parade

One weekend does not make a market. But the beef industry was hoping for a beef sales bonanza over the Memorial Day holiday. Alas, Mother Nature decided to rain on the beef parade. Instead of warm, sunny weather that would have encouraged more grilling, it was wet and cool in parts of the Midwest and Northeast. It was even damp in northern California where I live. San Francisco recorded its first Memorial Day rain in 20 years.

The rain was great for the parched pastures that I drive through every day. But it put a damper on grilling and retail beef sales, especially in the densely-populated Northwest. The result was that last week saw less fill-in beef business than hoped for. This put pressure on wholesale beef prices and fed cattle prices.

Memorial Day, unfortunately, was an extension of what’s been seen so far this year in the cattle markets. Early forecasts of record high prices have given way to dashed expectations. The year began with forecasts that all cattle prices would be higher this year—largely because the U.S. cattle herd on Jan. 1 this year was down 1.468 million head from a year earlier. In addition, far fewer Mexican feeder cattle were expected because of large numbers imported in 2012 and 20111 due to drought in Mexico.

The price of a 700- to 800-pound steer sold at the Oklahoma City Stockyards averaged $146.39 per cwt in 2012. This was up 9.5 percent from 2011’s average price and a similar price increase was expected this year. But heavy cattle feeding losses so far this year and enforced movement due to drought have dashed these hopes. The average price in the first quarter was $141.36 per cwt, compared to $152.81 per cwt in the year earlier quarter. Prices have not recovered although corn prices eased and reduced feedlot ration costs. The average Oklahoma City price for a 700- to 750-pound steer the week before last averaged $133.04 per cwt, down 13.5 percent on the same week last year.

As USDA noted in a May 16 report, continuation of the drought in the Southwestern and Southern Plains states generated fiscal pain for cow/ calf producers as feeder cattle and calf prices began to deteriorate. Feeder prices began to drop as a result of declining summer pasture prospects and increasing hay and other feed costs. Feeder cattle sales have been averaging 5 percent above year-earlier sales since the start of March, says USDA.

Not surprisingly, USDA and private analysts have reduced their forecasts for young cattle this year. USDA forecasts an annual average for 700-800 pounders of $145- 150 per cwt. Jim Robb of the Livestock Marketing Information Center has a lower forecast, $140-142. I suspect his numbers will be closer to the actual market if the widespread drought forces more cattle prematurely into feedlots. Drought continues in all the key cow/calf states. In mid-May, 53 percent of all beef cows in the U.S. were in states with at least 40 percent poor or very poor range/pasture conditions.

Another result of the drought, as USDA notes, is the continued high level of cow slaughter relative to Jan. 1’s cow inventories. Beef cow slaughter for the year to May 11 was nearly the same as last year. That’s remarkable, considering the industry lost 862,600 beef cows in 2012. Dairy cow slaughter is up about 5 percent year-on-year and imports of Canadian cows year to date are more than double those of last year.

Cow/calf producers wanted to expand their cow herds in 2012. But key inhibitors included: severe to exceptional drought; high input costs, notably feed; the average age of producers and their aversion to risk; lack of financing. The beef cow total might decline another 400,000 to 800,000 head by Jan. 1, 2014. It’s now unlikely that we will see any herd expansion until 2015 at the earliest.

The unexpectedly large cow slaughter in the face of soft demand for the first four months of the year hurt cull cow prices and depressed the wholesale price of domestic lean manufacturing beef. The price of fresh 90CL beef averaged $199.74 per cwt the week before last, the first time it was below $200 in a year or so. The price the same week last year averaged $230, although this price was inflated by lean finely textured beef being taken off the market due to a media furor surrounding it.

That’s why the industry was hoping that the Memorial Day weekend, which officially starts the grilling season, would boost beef sales of both steaks and hamburgers. Now it will have to depend on Father’s Day on June 16 and the Independence Day holiday for a lift in sales. — Steve Kay

(Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765-1725. Kay’s Korner appears exclusively in WLJ.)