Equity traders have a long-standing adage: “Sell in May and go away.” Commodity markets don’t get that luxury. Summer always involves important work around the market – be it on the cattle side or on the grain side. And given external events shaping up around the various markets, this summer’s beef business may require more attention than ever. With that said, let’s dig into the moving parts around the beef complex.
The big picture always starts with consumers. May’s final Consumer Sentiment reading (79.3) surged to its highest level since October, 2007 (80.9). The extent of optimism is surprising but is obviously helping to underpin solid beef prices – at least if one uses the wholesale market as an indicator (more on that later).
Boxed-beef prices have staged a major reversal in recent months with Choice product surging above $195/cwt. once again. The action represents about a $20/cwt. gain in just over seven weeks (Figure 1) and the third stab at the $200 level during the past six months.
As alluded to above, there are seemingly a lot of mixed signals around the market; as such, singular focus on any one indicator can prove somewhat misleading. Consideration of boxed-beef prices needs to be balanced with other data. Most significantly, USDA’s cold storage report signaled some concerns about volume of beef movement. April-ending beef inventories were 517.5 mil lbs.– 26% higher than the five-year average.
Meanwhile, pork inventories also grew – the combined product holdings will likely weigh on the market if not readily cleared in systematic fashion in coming months (Figure 2).
Therein enters consideration of last month’s observation about consumers, prices and purchasing behavior (read that column here). There’s an inherent negative relationship between price and quantity: so while consumer attitudes may be improving and retail and wholesale prices remain strong, volume in the marketing channel is falling behind. That’s especially concerning given that we’re on the cusp of growing supply and seasonally softer beef demand.
Regardless, better cutout values have provided renewed support on the live side. Once again, cattle feeders managed to hold off penetration below the cash market’s long-term support trend (Figure 3). That’s particularly important given that fed prices seemed poised to begin grinding lower.
The biggest benefactor, though, of higher wholesale prices was the packer; beef plants have finally leveraged gains on the meat side into better processing margins. That turnaround will help encourage throughput on the live side (despite the cold storage factor) and perhaps assist in muting build-up of front-end supply over the short run.
Nonetheless, this summer will likely be unsettled for the markets. The global aspect is especially important. Worries about Greece, Spain and the future of the European Union just won’t go away. That’ll weigh on equity and commodity markets, both directly and indirectly, in coming months.
Perhaps more concerning are indicators of broader global economic slowdown. That spells possibilities for slumping beef exports which have strongly anchored the market and producer revenue potential in recent years.
Lastly, April’s Cattle on Feed report provided some surprises. The biggest news surrounded placements, as feedyard arrivals lagged last year’s pace by 15% (on the heels of March placements –6% slower than 2011). The deficit likely was influenced by a number of factors. Most importantly, the decline perhaps signifies the beginning of heifer retention.
Either way, the feeding sector has proven relatively reluctant, unwilling or unable to source feeder cattle. The outcome being that year-to-date feedyard placements lag last year by 5%. However, that’s NOT true across the entire sector. In fact, combined placements within Nebraska, Iowa and South Dakota are actually running 5% ahead of 2011. That regional discrepancy is NOT a new trend (Figure 4).
It does, however, represent some important aspects regarding the evolving nature of the feeding industry. In general, cattle feeders in the Nebraska/Iowa/South Dakota region operate under different business dynamics vs. larger operations in the High Plains. Many are diversified businesses allowing for greater marketing flexibility from week to week. That ultimately possesses some important implications on sourcing finished cattle on the other end and regional fed market dynamics (another discussion for another day).
There are lots of mixed signals out there heading into summer – look for heightened choppiness around both cattle and grains during the next couple of months. Finding direction can prove difficult in these environments. As always, remain objective, stay informed!
Nevil Speer is a Western Kentucky University professor of animal science. Contact him at [email protected].