October 20, 2003
BEEF PRICES: WHEN WILL CONSUMERS SAY OUCH?
Cattle prices are searching for the top of the
market, and what a spectacular run they have had. October futures were near $70 in late June before
rallying to near $85 by late September. By October 15, they
reached a high of $103.60, a new record. Prior to this year, the
previous futures high was $84.30 established in March of 1993.
The question now is where is the top? While no one knows, a
strong argument can be made that the top was made this past week,
on October 15. The final answer will depend on the supply of
market ready cattle this fall, how consumers react to record high
beef prices, futures market performance, and short-run market
Market supplies are tight due to continued
reductions in the size of the U.S. calf crop; restrictions on
Canadian feeder cattle imports; and a small number of feedlot
placements last winter. The number of cattle on feed was down
about 8 percent in the first four months of this year, as feedlot
managers were hesitant to put cattle in the feedlot with high
priced corn. Placements picked-up in the spring and were up 13
percent in October. The current on-feed number stands at only 2
percent lower than the number on feed at this time last year.
The biggest supply news, however, has been the tiny
number of cattle available for slaughter in the past two weeks.
Last week, the number of cattle marketed was down 13 percent from
the same week last year and down 9 percent from the previous
week. In combination with the light weights, beef supplies have
been down 13 percent and 17 percent, respectively, compared to the
same weeks a year ago.
Part of the restricted marketings from feedlots was
due to the "locked-limit
October futures for five consecutive days, which totaled five of
the nine trading days in the past two weeks. Feedlot managers
with short hedges in place were rightfully unwilling to sell live
cattle when they could not lift their hedges by purchasing
futures. When the Chicago Mercantile Exchange raised the daily
limits on October 15, the futures market finally was able to trade
and perform its critical function as a hedging mechanism.
With only 2 percent fewer cattle on-feed, and with the
potential for a orderly hedging mechanism in futures, there is little
reason to believe that cattle numbers will not return to a more
realistic level, which is down 3 to 4 percent. With weights
continuing down 3 to 4 percent, about 6 to 8 percent less beef will be
produced this fall. In addition, the number of cattle put on-feed in
September that weighed 800 pounds or more was up 22 percent. These
cattle will reach slaughter this winter.
Another indicator of the cattle price top is when beef
consumers begin to look for alternatives to escalated beef prices."Sticker
will likely hit consumers at grocery stores in the next two weeks, but
may take longer for fast food establishments and table service
restaurants that are hesitant to change menu pricing until their
margins are tightly squeezed. While consumers have seemingly been
willing to pay the higher beef prices up to this point, that will
likely begin to change quickly. When packer margins erode, packer
bids will drop. Meat retailers will find plentiful supplies of pork
at moderate prices for weekly specials this fall. Chicken supplies
are also expected to be about 2 percent larger, with turkey supplies
about the same as a year-ago according to USDA estimates.
Concern about imports of beef from Canada from animals
less that 30 months of age were raised in the past two weeks when
Japan discovered their eighth BSE case in cattle. This case was a
calf that was only 23 months of age. USDA will first be concerned
about food safety as we begin to import Canadian beef, but once food
safety can be secured, consumer groups may also call for an
acceleration of Canadian imports.
What does all this mean for the cattle industry? Cattle
prices are far above what we can reasonably expect in an orderly
supply and demand situation for the fall. If this proves to be a
correct statement, pricing as many cattle as possible now makes
sense. This likely includes selling light weight animals as soon as
possible, and the consideration of hedging cattle that will be
marketed later this year and into the winter. Tremendous feeder
cattle and calf prices mean that calves should be sold and not
retained for feeding. Prices for animals that move into feedlots
should be based on current futures prices and likely should be hedged.
Issued by Chris Hurt