All eyes were on beef sales over the Memorial Day holiday weekend. A strong showing could determine the direction of the wholesale beef and live cattle markets the rest of the year, but a disappointing weekend might cause the market to struggle through the summer.

The cautious optimism with which red-meat processors began the year gave way to downright enthusiasm as markets strengthened dramatically in the spring. Wholesale beef prices, from cuts to grinds, staged a significant spring rally from early March to mid-May, and wholesale fresh pork prices also rallied dramatically. Livestock prices increased accordingly. But packers were able to raise wholesale prices sufficiently to maintain profitable operating margins well into the second quarter.

This was after processors of fed beef came off their most profitable first quarter in many years. Tyson Foods, the largest producer of fed beef, reported beef operating income of $126 million for the January-March quarter. This quarter is historically the toughest quarter for beef packers, but Tyson produced even better results than for its prior quarter ($119 million). Tyson’s beef business is on track to report record operating income for fiscal 2010, as it believes beef margins will be even stronger the second half of the year. Total income is likely to be well over $500 million.

JBS USA reported EBITDA (earnings before interest, taxation, depreciation and amortization) of $170.5 million for its beef business (which includes the U.S. and Australia) in the first quarter of 2010. This was 86 percent higher than a year earlier and followed EBITDA of $126 million in the 2009 fourth quarter.

Fourth-largest beef processor National Beef Packing reported net income of $49.4 million for its fiscal 2010 second quarter ended Feb 27. This was a record for its winter quarter and was 63 percent higher than the prior year’s $30.3 million. This pushed National’s earnings for the first half of fiscal 2010 to $90.6 million, vs. $27.7 million in the first half of 2009. So National appears on track to make record profits for the second straight year. It had record net income of $143.2 million in 2009.

In reporting its second-quarter results, National summed up the key markets factors just behind the market and now ahead of it. Beef prices have responded positively since the beginning of 2010 due to weatherrelated carcass-weight declines, fewer cattle on feed, improved beef exports and smaller beef imports, it said. The smaller-than-expected domestic beef supply has also found modest support from an economy slowly working its way out of a recession. Meanwhile, competing meat supplies do not appear burdensome, which should keep the overall protein supply in check and continue to support stronger yearon-year cattle and beef prices, it said.

Global beef and beef by-product demand will continue to improve on gradual economic gains and smaller global protein and by-product production, said National. But it also noted that for the remainder of 2010 and beyond, the cattle industry will continue to struggle with the long-term implications of a herd reduction.

Rally was supply-induced

The spring rally saw the Choice cutout values increase $33.50 per cwt from February 5 to May 11. The rally was almost entirely supply-induced and was the result of tighter-than-forecast total available beef supplies. Disappearance (domestic production plus imports minus exports) declined 3.8 percent in the first quarter vs. a year ago. March saw the smallest beef disappearance since 2001. Fed-beef disappearance for the quarter was down 1.2 percent and lean beef disappearance was down 8 percent. April disappearance was down 5 percent to 6 percent on a year ago.

The declines reflected an unusual confluence regarding the beef supply. Domestic production into mid-May was nearly 1 percent lower than the year-earlier period although total cattle slaughter was up 1.4 percent. That’s because carcass weights, especially on fed cattle, were down dramatically from last year’s levels because of adverse winter conditions.

Meanwhile, total beef exports were up 11 percent in volume in the first quarter vs. a year because of the improvement in the global economy and stronger demand from key markets Canada, Japan and South Korea. The high Australian dollar vs. the U.S. dollar made U.S. beef more competitive in Asia than six months ago.

Conversely, beef imports were down sharply the first fourth months of the year and are not likely to increase soon. The biggest year-on-year decline in imports was from Australia, down 39 percent from a year ago. Rains in Australia continued to delay seasonal cow sales. A second factor, as noted previously, was the high Australian dollar. The value of the U.S. dollar through much of the first quarter was 29 percent lower than the same period last year. This offset much of the benefit that Australia might have had from high U.S. prices for lean manufacturing beef.

Total available beef supplies will continue to be smaller than last year for the rest of 2010 and into 2011. USDA forecasts that beef exports will be up 10 percent on last year while imports, initially forecast to be down only marginally, might be down 5 percent. The key component is that domestic beef production is expected to be down as much as 2.2 percent from 2009 (to 25.4 billion lbs.). USDA currently forecasts production to be down 0.8 percent to 25.745 billion lbs., but this forecast appears to be too high, say analysts. At the lower production forecast, beef disappearance might be as low as 59 lbs. per capita in 2010, compared to 61.2 lbs. in 2009. USDA currently has the figure at 59.3 lbs.

Higher retail prices loom

How wholesale beef prices perform from now on depends on how consumers respond to expected higher retail prices. Supply factors determine price directions, but demand determines price levels. Overall beef demand (retail, foodservice and exports) fell 10.8 percent in 2009 from 2008. Demand in this year’s first quarter was down 3 percent from a year earlier. But an encouraging sign is that it was up 1 percent over the fourth quarter. Demand is expected to recover somewhat faster the rest of the year and might end up 5 percent higher in 2010 than in 2009, say analysts.

However, retailers began raising some of their everyday beef prices in mid-April in response to the huge increase in wholesale prices. Pricing for the Memorial Day holiday was mostly completed the second week of May. But there’s little doubt that the March-April wholesale rally crimped retailers’ ability to feature beef aggressively for the grilling holiday.

The Memorial Day holiday is the biggest beef sales weekend of the year. So the volume of sales it created was expected to have an almost immediate effect on the market. A disappointing weekend would likely force packers to reduce production to keep wholesale beef prices stable. But a strong weekend might force retainers to reorder more beef than expected and allow packers to push wholesale prices higher. The holiday also marks a pivotal point in the outlook for the rest of 2010 because retailers were likely to raise their everyday beef prices sharply after the holiday. Prices are expected to be record high this summer. Retailers will also feature beef less the next two or three months.

Foodservice business so far in 2010 appears to be stronger than last year, with some reports suggesting it was up as much as 7 percent in April from a year earlier. White tablecloth business is picking up a little and tourist destinations such as Las Vegas are seeing more visitors. Convention business there is starting to pick up as well. One concern is that quick-service restaurants, notably hamburger chains, face challenges the rest of this year. Beef raw material costs have increased sharply and will erode their margins unless they raise menu prices.

It will also be important to watch how and if improved beef demand at the foodservice level affects retail beef demand. Consumers in 2009 transferred some of their food dollars from eating out to eating at home. If they eat out more this year, will they spend less at home? Overall, the level of demand improvement still depends on more out-of-work Americans getting jobs and those in work feeling more job-secure. Unemployment levels remained just under 10 percent in May.

The supply outlook remains unchanged from the start of the year. Market-ready supplies of cattle will decline the rest of the year and feeder and live cattle prices will remain at significantly higher levels throughout the year than in 2009. Prices for live cattle might be 10-13 percent higher on average than in 2009. That’s mainly because the total population for the U.S., Canada and Mexico herds declined by 3.8 million head from Jan. 1, 2008, to Jan. 1, 2010. Beef demand from this point on will largely determine price levels.

Pork also gets expensive

Meanwhile, the pork complex enjoyed its own remarkable rally during the first five months. Similar to the beef rally, the main driver was tighter available pork supplies due to a sharp year-onyear decline in domestic production and slightly larger exports of muscle cuts.

The pork cutout, which reflects fresh cuts, began the year 23.5 percent higher than the prior year at $67.73 per cwt (for the week ended Jan. 2). As impressive as this was that the cutout continued to work higher, it reached $90.00 the week ended May 8, which was 58 percent higher than the same week last year.

USDA currently forecasts pork production to decline 3.3 percent in 2010 from 2009. But production was down 4.5 percent the first four months of the year and may remain this far below 2009 levels based on USDA’s quarterly Hogs and Pigs report released March 26. Hog slaughter the first five months of 2010 was down 4.2 percent on the same period last year and this level of decline might continue the rest of the year.

The report showed that the number of market hogs on March 1 was down 2.7 percent from a year earlier, a much sharper decline than the 0.9 percent decline forecasted by analysts. The report also revealed a larger than expected decline in the number of hogs kept for breeding. It was down 3.9 percent from a year earlier, versus estimates of a 2.6 percent decline. USDA also forecasted that spring farrowings would be down 4.0 percent and summer farrowings would decline 2.4 percent.

Pork exports in the first quarter were only slightly down on the same period in 2009. USDA currently projects that 2010 exports will be up 5.7 percent on 2009, but private analysts believe this level of increase is too high.

Should USDA be accurate in its production and export numbers, total available pork supplies in 2010 would be 47.0 lbs. per capita, down from 50.1 lbs. in 2009. This would be the largest year-on-year decline for many years.

Chicken fills the void

In a year in which red-meat disappearance is likely to be down sharply, the chicken complex appears to be increasing production to take advantage of the developing “protein gap.” Broiler production the first five months of the year was up more than 4 percent on the same period last year. USDA’s latest forecast is for 2010 production to total 36.3 billion lbs., up 2 percent from 2009.

With exports banned to Russia and China for the early months of the year, USDA forecasts that poultry exports this year will be down 17.7 percent on 2009 levels. This leads USDA to forecast total available chicken supplies at 84.2 lbs. per capita, vs. 79.6 lbs. in 2009.

Chicken will continue to fill the protein hole in 2011 as well. USDA forecasts that beef disappearance next year will decline a full pound to an average of 58.3 lbs. per person. This would be the lowest disappearance figure since the 1930s. Disappearance peaked at nearly 95 lbs. per person in 1976. This year’s number will be 37 percent below that peak. Increased pork production in 2011 will more than offset larger exports so disappearance will increase slightly to 47.3 lbs., says USDA. Chicken disappearance in 2011 will increase again, to 85.8 lbs. This would mean a 6.2 lbs. per person increase in two years.

The disappearance forecasts are positive for companies producing all three proteins, such as Tyson Foods and JBS USA. Any concerns about increased U.S. chicken production this year and next should dissipate because of the protein shortage that is developing. Pilgrim’s Pride Corporation, 64 percent of which is owned by JBS, says it will increase production 10 percent, starting in January next year. But it is unlikely to do so unless increased domestic and global demand justifies it. Tyson currently appears more focused on improving the competitiveness of its chicken plants than increasing production. It still has a lot of facilities to do a lot of work in, says COO Jim Lochner.

Tyson is selling more chicken dark meat domestically than at any time in its history, says Lochner. In its January-March quarter, Tyson bought breast meat on the open market rather than produce its own whole birds and then have to sell the dark meat. This kind of approach reflects the lack of dark meat exports to Russia and is likely to continue until the dark meat business improves.

Higher wholesale beef and pork prices due to the reduced available supplies will favor chicken in another way. Not only will Americans eat even more chicken than red meat. The latter will be less competitive with chicken and consumers are likely to continue to buy meat based on absolute price rather than relative value. While the outlook into 2011 looks solid for red meat processors because of shrinking supplies, poultry processors will reap the benefits of gaining an even greater share of consumers’ food dollars and their stomachs. •

Steve Kay is editor and publisher of Petaluma, Calif.-based Cattle Buyers Weekly: www.cattlebuyersweekly.com .