The fed market finally took a breath in April. Following $152+ trade in March, steer and heifers backed up to the mid-$140s late in the month. The drift isn’t surprising; after all, the string of new records with each passing month had to eventually end. The decline in recent weeks also marks the late-March $152+ trade as the spring high.
There was some holdout of hope for better prices in April if consumers suddenly broke out of hibernation . However, that was unlikely due to continued cool temperatures and a late Easter. And as noted last month, boxed-beef prices were already beginning to run out of steam. Therefore, April proves to be the turning month from spring highs to summer lows. Buyers and sellers now begin strategizing around summer and how it might play out.
This market has proven persistently stubborn . While April didn’t provide any surprise to the upside, most significant was the market’s resilience – especially later in the month. Fed prices are bound to work seasonally lower in the coming weeks and months as we head into summer. But if April is any indication of the broader undertone, it’s not going to happen without a fight.
The average break from the spring high to the summer low during the past three years is about $15/cwt. That puts the market trading down somewhere around the mid-$130s. Current CME June and August futures are consistent with that historical break (August trading $135+ at press time). That break represents about $200/head; roughly equivalent to about a $25 move in boxed-beef prices (if trading dollar-for-dollar) from the spring high. That would make summer’s Choice cutout trading down to somewhere around $210.
That said, the market will need to be monitored carefully in the coming months. That’s because the supply picture looks different this year. Cattle feeders have been busy  during the past four months. Placements during December through March are 382,000 ahead of last year’s pace. With the equivalency of 17 weeks of slaughter from May through August, the beef complex needs to harvest an additional 22,500 head/week vs. 2013.
As such, those early-2014 placements may result in some additional pressure on the market in the months to come. Therefore, watching marketing flow will be especially important as trade now transitions into the June contract.
Larger placements early in the year also have important implications for the feeder market. As explained last month, “…cattle feeders are pulling ahead available supply, which will only serve to confound the hunt for feeder cattle in the second half of the year.” As feedyards go shopping for replacements  in the back half of 2014, they’ll ultimately be forced to work that much harder to fill pens.
That occurs around a feeder market that’s already been on an extended winning streak during the past year (Figure 1).
The CME Feeder Cattle Index bottomed in May 2013 and has since added nearly $50/cwt., or about $375/head in less than a year – a 38% increase in just 11 months. At current levels, yearlings now cost $1,350/head and thus make total load values to encroach nearly $90,000.
That supply perspective is supportive of even stronger prices from here, and underpins favorably trending prices for sellers into the fall run. But it could get even better yet when considering some of the dynamics around the corn market. Clearly, there’s a long way to go before we have a new corn crop in the bin. However, if weather proves friendly, the corn market could be poised for a large break.
Corn prices have held firm around $5 during April (Figure 2).
That’s come while funds have been busy increasing their positions on the buy side of the market in recent months (Figure 3).
Given the large buildup, if that money gets tired of, or worried about, corn prices , the exit could spell a sharp break in corn futures. That’ll boost feeder prices even higher later in the year. In sum, the feeder market is comfortably working within a new trading range.
All that said, what’s most significant for the beef complex is the ever-increasing amount of capital at risk . That point can’t be understated and the money that flows through this business would rival any industry. Increasing requirements for, and subsequent access to, capital will serve as a huge influence upon winners and losers going forward.
With that said, producers are encouraged to remain fully informed, stay disciplined and be determinedly objective to ensure successful decision making going forward.
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