Fridayâ€™s USDA Cattle on Feed Report is relatively market neutral. On the plus side, the 2.22 million cattle going into feedlots in May were down 4% a strong percent below trade expectations. As a result, placements could buoy deferred fed cattle futures.
However, May marketings came in 1% below May last year and a sharp 11% below May 2003. Traders expected marketings about even with last year. Slower marketings raise concerns cattle may be backing up. Higher weights confirm that suspicion. The resultâ€”expect some pressure on nearby futures and cash bids.
Fed cattle profits remain elusive
Jim Mintert, Kansas State University economist, expects cash slaughter cattle prices to be under pressure the rest of the spring and summer.
"Southern Plains slaughter steer prices in late May had already fallen into the upper $80â€™s per cwt. Odds are high that cash prices will average in the low-to-mid $80â€™s for the summer quarter," he says. "In fact, given springâ€™s placements pattern, plus expectations dressed weights will continue to run well ahead of last year, odds are good slaughter cattle prices will set weekly lows near $80 this summer." That all assumes live cattle trade with Canada and beef trade with Japan and South Korea will remain limited.
Mintert expects slaughter cattle prices to rebound this fall. "But the recovery will depend on how cattle feeders react to losses this summer," he explains. "If cattle feeders do not slow the marketing pace excessively this summer, fall slaughter steer prices should average in the mid-to-upper $80s."
Cattle stampede into Canadian yards
CanFax reported that Alberta and Saskatchewan had 882,003 cattle on feed June 1. Thatâ€™s up a husky 15% from June 1 last year, but a modest 3% above June 1, 2003. Cattle that might otherwise have come here for feeding may end up as export beef at Canadian ports.
May placements in the two provinces were up 27% from 2004. For perspective the 173,498 cattle going on feed in the two provinces in May totaled about 8% of our 2.2 million head May placements.
Retail prices "sticky" downward
Ample anecdotal evidence suggests consumers are backing away from "high-priced" beef, therefore demand is softening.
Yet USDAâ€™s retail price data released last week pegged the May average Choice beef price of $4.26 per pound, second highest only to November 2003â€™s $4.32 per pound.
So what does this say about demand? "Perhaps not much because little price discovery actually occurs at retail," says Steve Meyer, Paragon Economics, Adel, Iowa. "Most research suggests the bulk of price and value discovery occur at the wholesale and farm levels. Retail prices are reactive.
"Plus, retail price changes lag other price changes by several months with the length of response longer for downward changes," he adds. "That makes sense. A retailer making more money would change retail prices as slowly as possible--and then only when competitors force him to do so. On the other hand, a retailer caught between a "normal" retail price and rising product costs will mark prices up quickly. No one likes losing money--especially when it affects your bonus.
Meyer still sees soft wholesale markets, especially for pork, as a sign of some demand deterioration from last year. It is not likely that retail prices for either species will ever reflect all of this softness since the wholesale-retail spreads generally function as the systemsâ€™ shock absorbers.