October 2003
Cattle prices are searching for the top of the market,
and what a spectacular run they have had. October futures
were near $70 in late June before rallying to near $85 by
late September. By October 15, they reached a high of $103.60,
a new record. Prior to this year, the previous futures high
was $84.30 established in March of 1993. The question now
is where is the top?
While no one knows, a strong argument can be made that
the top was made this past week, on October 15th. The final
answer will depend upon the supply of market ready cattle
this fall, how consumers react to record high beef prices,
futures market performance, and in the short-run market
psychology.
Market supplies are tight due to continued reductions in
our U.S. calf crop; to restrictions on Canadian feeder cattle
imports; and to a small number of placements last winter.
On-feed numbers were down about eight percent in the first
four months of this year as feedlot managers were hesitant
to put cattle in the feedlot with high price corn. Placements
picked-up in the spring and most recently were up 13 percent
in October. The current on-feed number stands at only two
percent lower than last year at this time
The biggest supply news however has been the tiny number
of cattle available for slaughter in the past two weeks.
Last week, the number of head marketed was down 13 percent
from the same week last year and down nine percent the previous
week. In combination with the light weights, beef supplies
have been down 13 percent and 17 percent compared to the
same weeks a year ago.
Part of the restricted marketings out of feedlots was due
to the “locked-limit up” October futures for
five consecutive days, which totaled five of the nine trading
days in the past two weeks. Feedlot managers with short
hedges in place were rightfully unwilling to sell live cattle
when they could not lift their hedges by purchasing futures.
When the Chicago Mercantile Exchange raised the daily limits
on October 15, the futures market finally was able to trade
and thus perform its critical function as a hedging mechanism.
With only two percent fewer cattle on-feed, and with the
potential for a orderly hedging mechanism in futures, there
is little reason to believe that cattle numbers won’t
return to a more realistic level which is down three to
four percent. With weights continuing down three to four
percent this mean about six to eight percent less beef this
fall. In addition, the number of cattle put on-feed in September
that weighed 800 pounds or more was up 22 percent. These
cattle will reach slaughter this winter.
Another indicator of the cattle price top is when beef
consumers begin to look for alternatives to escalated beef
prices. “Sticker shock” will likely hit consumers
in the next two weeks at grocery stores, but may take longer
for fast food establishments and table service restaurants
that are hesitant to change menu pricing until their margins
are tightly squeezed. While consumers have seemingly been
willing to pay the higher beef prices up to this point that
will likely begin to change quickly. When packer margins
erode, packer bids will drop.
Meat retailers will find plentiful supplies of pork at
moderate retail prices for weekly specials this fall. Chicken
supplies are also expected to be about two percent greater
with turkey supplies about the same as a year-ago according
to USDA estimates.
Concern about imports of beef from Canada from animals
less that 30 months of age were raised in the past two weeks
when Japan discovered their eighth BSE case in cattle. This
one in a calf that was only 23 months of age. USDA will
first be concerned about food safety as we begin to import
Canadian beef, but once food safety can be secured, consumer
groups may also call for an acceleration of Canadian imports.
What does all this mean for the cattle industry? Cattle
prices are far above what we can reasonably expect in an
orderly supply and demand situation for the fall. If this
proves a correct statement, pricing as many cattle now as
possible makes sense. This likely includes selling light
weight animals as soon as possible, and the consideration
to hedging cattle that will be marketed later this year
and into the winter. Tremendous feeder cattle and calf prices
mean that calves should be sold and not retained for feeding,
and prices for animals that move into feedlots should be
based upon current futures prices and likely should be hedged.
Chris Hurt
Purdue University
October 20, 2003
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