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"October futures were near $70 in late
June before rallying to near $85 by late September," said Chris
Hurt. "By Oct. 15, they reached a high of $103.60, a new record.
Prior to this year, the previous 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 Oct. 15.
"The final answer will depend on the
supply of market-ready cattle this fall, how consumers react to
record-high beef prices, futures market performance and short-run
market psychology."
Hurt's comments came as he reviewed the
state of cattle and beef prices.
Market supplies are tight due to
continued reductions in the size of the U.S. calf crop, restrictions
on Canadian feeder cattle imports and a small number of feedlot
placements last winter, Hurt noted.
"The number of cattle on feed was down
about 8 percent in the first four months of this year, as feedlot
managers were hesitant to put cattle in the feedlot, with
high-priced corn," he said. "Placements picked up in the spring and
were up 13 percent in October. The current on-feed number stands at
only 2 percent lower than the number on feed at this time last
year."
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 cattle marketed was down 13
percent from the same week last year and down 9 percent from the
previous week. In combination with the light weights, beef supplies
have been down 13 percent and 17 percent, respectively, compared to
the same weeks a year ago.
"Part of the restricted marketings from
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," said Hurt. "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 Oct. 15, the futures market finally was
able to trade and perform its critical function as a hedging
mechanism."
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this article]
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With only 2 percent fewer cattle on
feed and with the potential for an orderly hedging mechanism in
futures, there is little reason to believe that cattle numbers will
not return to a more realistic level, which is down 3 percent to 4
percent, said Hurt. With weights continuing down 3 percent to 4
percent, about 6 percent to 8 percent less beef will be produced
this fall. In addition, the number of cattle that weighed 800 pounds
or more and were put on feed in September 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," Hurt noted. "'Sticker shock' will likely hit
consumers at grocery stores in the next two weeks 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 prices for weekly specials this fall. Chicken supplies
are also expected to be about 2 percent larger, with turkey supplies
about the same as a year ago, according to USDA estimates."
Concerns about imports of beef from
Canada from animals less than 30 months of age were raised in the
past two weeks when Japan discovered their eighth BSE (mad cow
disease) case in cattle. This case was a calf 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," he said. "What does all this mean
for the cattle industry?"
Hurt believes that cattle prices are
far above what we can reasonably expect in an orderly
supply-and-demand situation for fall.
"If this proves to be a correct
statement, pricing as many cattle as possible now makes sense," he
said. "This likely includes selling lightweight animals as soon as
possible and the consideration of 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. Prices for animals that move into feedlots
should be based on current futures prices and likely should be
hedged."
[University
of Illinois news release]
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