Will weak cattle prices continue?
URBANA (University of Illinois) – Chris Hurt, Purdue University Extension economist, expected finished cattle prices to have a bullish year with prices well into the $130 range by now.
Live cattle futures started the year with the same enthusiasm, but have deflated. What went wrong?
“The mystery can be unraveled by looking at supply and demand,” Hurt said. “On the supply side, the expectation at the start of 2013 was for a 3 percent decline in beef production during the first half of the year.
“To date, beef supplies have been down closer to 1 percent. More beef often means lower prices.”
Hurt said there seems to be three demand components contributing to the weaker-than-expected cattle prices.
First, the United States economy may have been weaker so far this year than anticipated.
Second, reduced pork and chicken exports have meant that more of those products have been adding to domestic meat supplies.
Third, retail beef prices rose to record-high levels while retail prices of competitive animal proteins were not rising as much or even falling.
“Beef exports now look somewhat weaker than last year,” Hurt said. “The culprit seems to be the strength of the U.S. dollar.
“The dollar has risen about 4 percent so far this year. Even more dramatic has been the 12 percent drop in the value of the Japanese yen relative to the dollar. Japan is an important buyer of U.S. beef.”
Hurt said pork exports have dropped off sharply this year, down 14 percent in the first two months of the year with chicken exports down 3 percent.
Lower exports mean that there is more pork and chicken that remains in the domestic market to compete with beef.
“The weak U.S. economy has many consumers shopping for value,” Hurt sauid, “and competitive animal proteins have had lower prices relative to beef over the past six months.
“Retail choice-beef prices have been at record-high levels this year, reaching $5.30 per retail pound in March. Retail beef prices have risen relative to retail pork prices by about 6 percent over the past six months.
“Beef prices have risen about 10 percent relative to turkey, 4 percent relative to chicken, and 7 percent relative to eggs,” he said.
According to Hurt, the April 22 Cattle on Feed report suggests some changes in direction for feedlot managers.
“The changes are consistent with the recent lower prices of corn and other feed ingredients,” Hhe said. “First, managers were anxious to place more cattle in March with placements up 6 percent compared to a year ago.
“From July 2012 to February 2013, monthly placements averaged 8 percent lower due to high feed prices.
“Second, marketings were smaller than expected in March as managers now seem willing to market at higher weights given cheaper feed. There is a lot of unused pen space in feedlots, and managers want to use that anyway they can.”
Live cattle futures have responded to the downside this year. As an example, Hurt said, June futures have fallen $10 per hundredweight from the low $130s at the start of the year to the low $120s today.
Continued small beef supplies for the rest of this year suggest prices will recover.
“Second- and third-quarter beef supplies are expected to be down 3 percent and should enable finished steer prices to maintain the mid-$120s.,” Hurty said. “Last-quarter supplies could drop by 6 to 7 percent with prices rising into the low $130s.
“First quarter 2014 prices should improve a few dollars toward the low- to mid-$130’s. These forecasts are all higher than current futures prices.”
Hurt said if crop yields are closer to normal this year, much lower feed prices will stimulate expansion of all animal species, assuming corn moves to near $5 per bushel or lower as current markets anticipate by harvest.
“More normal crop yields imply improved pasture conditions, at least in the southeastern United States and the Midwest,” Hurt said. “Under these conditions, heifer retention is expected to begin in the fall, at least in areas that have improved pastures and ranges.
“The magnitude of the expansion will depend on the level of improvement in crop and forage yields and on how low feed prices drop.
“Generally, the early stages of expansion result in the highest prices across the cattle cycle as slaughter supplies are already small and heifer retention pulls down beef supply even more,” Hurt concluded. “All this suggests better days ahead for both finished cattle and calf prices.”
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