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Market Report: Carryover Presents A Challenge

Article-Market Report: Carryover Presents A Challenge

Market Report: Carryover Presents A Challenge
Cattle feeders have done a great job thus far fending off the onslaught of negative pressure, but serious cracks began to appear in April.

USDA’s BSE announcement of last week was largely a non-event, as it occurred without any disruption in the normal flow of commerce. The potential for delayed implications always exists. That is, BSE could be used as a wedge around other trade issues and some deferred mopping up may be required at a later date. It’s unlikely, but such scrums are always possible when it comes to international trade (especially in an election year).

Regardless, BSE is NOT a risk. And the outcome thus far underscores the value of being proactive and transparent with consumers (domestic and global) about any issue. The beef industry and regulatory agencies have cooperatively worked hard toward this very conclusion. The payoff being business as usual!     

Turning our attention to the more tangible aspects of the market, the primary story during the past several months revolves around cattle feeders. They’ve done a great job fending off the onslaught of negative pressure. But serious cracks began to appear last month.

The market has since been pressured by a turn in momentum and appears to be in a consolidation phase (Figure 1). April witnessed continued decline in both live and futures prices. Steer and heifer trade slipped from mostly $125-$126 in March down to $120-$122 in April. That action dispelled any hope of retesting the $129 spring-high established several months ago.

Worse yet, April’s ending trade of $120 has the market testing, and likely penetrating, long-term support in the coming months (Figure 2). Price action from the spring-high to the summer-low typically equates a slide of about 15% – that positions 2012’s low somewhere around $110.

So that finds us coming back to several points highlighted over the past several months. The market is subject to even further downward pressure from both sides of the price equation. That occurs through:

  • Consumers pushing back against current price levels, and/or
  • Front-end supply becoming burdensome.

From a demand perspective, broader economic concerns seem to linger indefinitely. While gas prices are declining, it appears the consumer is still being pressured. That’s especially true at the grocery store.

Those concerns were recently reinforced by the 2012 Power of Meat report. Unit price has always been an overwhelming driver in purchasing decisions; however, the survey highlighted increasing influence of total package cost and promotions on meat purchasing behavior. Therein enters also some consideration of recent retail trends. Retail beef prices remain at the upper end of relative costs compared to pork and poultry (Figure 3).

Looking at supply

With respect to supply, it’s important to remember that seasonal summer lows aren’t automatic nor necessarily short-lived. There remains some heavy lifting ahead for the market. Primarily, April’s cattle-on-feed report pegged total inventories at 11.48 million head; 225,000 head ahead of last year, and 740,000 head more than 2010!

Assuming average feedyard turnover, weekly throughput needs to be about 9,000 head faster than last year’s pace. But here’s the kicker, through the first quarter of 2012, weekly steer/heifer marketings are running about 5,000 head behind last year’s rate (Figure 4).

From an alternative perspective, last year’s weekly fed cattle sales during April-September ramped up to 456,000 head – an increase of 22,000 head vs. the first quarter. Given the discussion above, the 2012 April-September pace needs to get to 465,000. However, April throughput is already 5% behind 2011. In other words, we’re starting from a deficit and need to catch up. Failure to do so could mean some long months slugging through carryover.

Turning our attention to the grain complex, the CME has announced plans to widen the trading schedule to 22 hours/day. Over the long run, that likely means more noise and volatility within the grain markets on a daily or weekly basis. If that indeed occurs, there will exist the likelihood of larger margin requirements to cover positions within the market. That scenario further underscores the importance of capital management going forward!

As always, remain objective, stay informed!

Nevil Speer is a Western Kentucky University professor of animal science. Contact him at [email protected].

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