June 20, 2011
by Steve Kay
What a difference a year makes, and what a spring for the US red meat industry. Wherever you looked, records were being broken on a regular basis as this year’s first quarter progressed. But the result has been double-edged. While record-high livestock prices mostly put more money into the pockets of producers, it began to take more money out of the pockets of consumers, as they faced record-high retail beef and pork prices.
This, in turn, led to concerns that beef and, to a lesser extent, pork were pricing themselves beyond the reach of some consumers just as the grilling season got underway in May. A cold, extremely wet spring in some regions of the country had already put a damper on sales of barbecue items. And with gasoline averaging $4 per gallon nationally the first week of May, the fear was that meat sales in the month would not be as strong as expected.
The litmus test for the red meat industry for the rest of 2011 is whether record retail prices, combined with higher gas prices, will impact the industry’s ability to keep selling livestock and meat at high enough prices for producers and packers to make money. All wealth to the industry comes from consumers. So there is a well-founded concern that record prices in the grocery store could force Americans to buy less beef and pork...and buy more chicken.
Such a decision will be based on economics rather than consumer preference for one protein over another, say analysts. It will also be based on which protein is in most plentiful supply on the domestic market. The answer to that is clearly chicken. It’s perhaps the main reason why poultry processors have maintained higher production levels so far this year, even though wholesale prices have been lower than this time last year and feed costs have increased substantially. Exports increase
US Dept. of Agrriculture reports from the beginning of the year had indicated beef and pork disappearance (total available supplies) would decline in 2011 from 2010 levels and that chicken disappearance would increase. USDA’s latest World Supply and Demand Estimates (WASDE) report on May 11 estimated beef supplies would be 58.4 lbs. per person in 2011 vs. 59.6 lbs. in 2010. Pork supplies would be 46.8 lbs. vs. 47.7 lbs. Broiler supplies would increase to 84.8 lbs. from 82.2 lbs. in 2010. So, chicken will fill “the protein hole” left by shrinking red meat supplies.
The decline in the disappearance numbers for beef and pork is largely because of a projected increase in exports of both meats this year vs. 2010. USDA says beef exports this year will total 2.475 billion lbs., 7.7 percent higher than last year’s 2.299 billion lbs. Conversely, beef imports will be down 5.1 percent on last year.
Private analysts believe USDA’s export forecast is too low. Some had exports of beef and beef variety meats up 50 percent in the first quarter vs. the first quarter last year. Analysts also believe imports will be smaller than USDA projects. If their forecasts are correct, available beef supplies will be smaller than those projected by USDA. Pork exports are strong so far this year, and USDA projects them to total 4.675 billion lbs., up 10.6 percent on 2010. Pork production this year will be up only 0.8 percent, hence the decline in available supplies.
The smaller red meat supply suggests that retail beef and pork prices might remain at record-high levels at least into the summer. Retailers were reluctant to raise their beef prices much in January but were forced to do so in February and March. The All Beef price was a record $4.26 per lb. in January, $4.35 in February and $4.48 in March, another record for any month. This was a 5.2 percent increase in two months. The March price was 13.1 percent higher than the year before. The April, June and July average price might also be record high even as wholesale beef prices decline seasonally because retailers will want to reclaim their lost beef margins, say analysts. Beef demand up
The record retail prices meant retail beef demand was up 9.3 percent in the first quarter compared to last year, says analyst Andrew Gottschalk, HedgersEdge.com. This, along with export volumes up 50 percent, meant overall beef demand was strong in the quarter. He expects beef demand to remain stronger than a year ago throughout the year, but he cautions that quarterly improvements will be smaller than in the first quarter. Retail pork demand was up 10.1 percent in the first quarter and the outlook for the rest of the year is similar to that of beef, he says.
The big test for beef sales will come this month, now that the Memorial Day holiday has come and gone. It is the biggest weekend for beef sales of the year, after what normally is the strongest demand month of the year. Demand seasonally holds up well in June but declines in July and August, in part because hotter weather reduces consumers’ red meat consumption. As noted, the added concern this year is if retailers keep raising their beef prices.
Yet, strong beef sales will be essential throughout the summer if the market is to absorb a sharp seasonal increase in cattle slaughter and beef production without an equally sharp decline in wholesale beef and live cattle prices. Gottschalk projected that commercial cattle slaughter totaled 2.7 million head in April and 2.86 million head in May, and would total 3.050 million in June, 2.85 million in July and 3.13 million in August.
This reflected his forecast that the front-end supply of cattle (those on feed 120 days or more) would increase rapidly during the May-August period. Placements of cattle into feedlots in March were up 3.3 percent on the year before and were likely large in April because of droughts in Texas and Mexico, and the wildfires in Texas.
Any further increase in monthly placements will only extend the increase in the front-end supply into the early fall, Gottschalk says. The level of this supply will generate some carryover into the fall, as it will be difficult to market through the beginning month front-end supplies. With premiums in deferred futures and the distribution of placements towards lighter average weight cattle, producers will have the ability to extend the time on feed to seek the premium markets. The challenge will be to remain current in their marketing this summer, he says.
Cash live cattle prices began 2011 averaging $105.45 per cwt the first week (based on USDA’s five-area average fed steer price). They declined the last two weeks of January and it appeared that a further decline would occur as the market faced February and March, the two weakest beef demand months of the year. But February experienced a contra-seasonal rally that took producers and packers by surprise, putting in new, all-time record highs every week. Prices advanced even more in March, jumping $5.50 per cwt in one week alone. They fell back the next week but then leapt more than $6 the last week of March. This meant that fed cattle prices averaged $110.40 in the first quarter, 13.2 percent higher than in the first quarter of 2010.
Despite this performance, the market wasn’t done breaking records. Prices put in their spring high of $123.20 the first week of April before they began to retreat. By the second week of May, average prices had dropped back to $113 per cwt. This disappointed many producers. But the rally to record-high prices had been equally unexpected so a sharp correction was to be expected, say analysts. Another factor, was a mass liquidation of all types of commodities futures, mainly by commodity funds.
Analysts forecast that live cattle prices will decline at least 10 percent from the spring high to their summer low. This would take prices down to $111 per cwt. Should they decline to a more normal 15 percent, they would make a low of $105, possibly in late July. Packers will need to buy cattle at least this cheaply if wholesale beef prices also decline according to their seasonal pattern. It also appears by-product values have topped out for now after establishing new record highs every week but two of the first 16 weeks of the year. The values reached $13.72 per cwt the week ended April 23, which was 27.7 percent higher than the same week last year. But they had declined to an average $13.59 the first week of May.
These record values, surging beef exports and higher wholesale beef prices all contributed to packers’ ability to pay record-high prices for their raw material in the first quarter. They also had little choice at times because of tight supplies of market-ready cattle and live cattle futures prices that put in now life-of-contract highs at the start of April.
Wholesale beef prices, as reflected by USDA’s weekly comprehensive cutout value, rose steadily throughout the first quarter to put in a new high (for the data series) of $189.37 per cwt the first week of April. This was $27.27 or 16.8 percent higher than the same week a year ago. On a daily or spot market basis, the Choice cutout put in a high of $190.96 per cwt that week. This was about $8 below its all-time daily high in October 2008.
One feature highlighted by data in USDA’s comprehensive report is that packers continue to sell more of their beef through formula pricing than by any other means. Second is selling on the spot market. Formula sales in the first quarter often exceeded 45 percent of all beef sold, while spot market (sold from zero to 21 days) taking 35 percent or more. This often left only 15 percent of sales as sold forward, reflecting packers’ inability to get beef buyers to commit to more out-front sales while boxed-beef prices remained so high. Pork prices remain strong
Much of what has occurred in the pork complex this year mirrors the beef complex. The pork cutout peaked at $95.90 per cwt the second week of April and subsequently weakened the following month. Live hog prices though remained around the $90 per cwt level on a lean basis. So pork processors’ margins, after being solidly black for 18 months, were slim or even negative in April and early May. One big difference to beef is that supplies of market-ready hogs seasonally tighten into the summer.
Another difference is that pork in April and May was under-valued relative to beef. Because of this, retailers increasingly turned to pork for their feature activity. Pork’s competitive advantage might be beef’s biggest hurdle the rest of 2011. Even though beef production is forecast to decline 3.5 percent in the fourth quarter versus a year earlier, there’s no guarantee this will mean record high boxed beef or live cattle prices. How consumers stomach record-high prices in the grocery store will be far more important. Steve Kay is editor and publisher of Petaluma, Calif.-based Cattle Buyers Weekly (www.cattlebuyersweekly.com)