In the Cattle Markets
Softening fed-cattle price expectations.
Much of the conversation in the cattle market during the last several months (years, even) has focused on declining cattle numbers and the supply-side support for prices that will characterize the market for the foreseeable future. The recent inventory report (discussed by Glynn Tonsor in the Feb. 4 In the Cattle Markets newsletter) provided confirmation of this decline in numbers. In the context of this fresh information on contracting cattle supplies, the behavior of cattle futures prices is worth noting.
In mid-December last year, the April live-cattle contract on the Chicago Market Exchange (CME) traded as high as $138. The December contract got within about 50¢ of that level, as well. These price expectations were largely based on expectations of tight meat supplies and continued slow but steady economic growth.
However, since that mid-December peak, live-cattle futures prices have dropped substantially. The week of Feb. 11, the April contract traded (briefly) below $128; and the December contract traded down to around $130.
This decline in live-cattle prices has, of course, been accompanied by a decline in feeder-cattle futures prices, as well. Why the deterioration in price expectations? The Cattle Inventory Report just confirmed tighter numbers. Notwithstanding a dip in real GDP in the fourth quarter last year, other economic indicators are not really out of line with where they have been for many months and some (home prices, for example) have shown notable improvement, which should be firming up the demand side of expectations.
One thing that has changed considerably since late last year is expectations of total meat production in 2013. While smaller cattle inventories point to smaller beef production down the road, short-run expectations for beef production have been revised steadily higher since about last November.
For example, the most recent World Agricultural Supply and Demand Estimates (WASDE) report from USDA included a forecast for first-quarter beef production of just more than 6.3 billion pounds (lb.). That’s nearly 4% higher than their 2013 first-quarter forecast from last November (which was a bit less than 6.1 billion lb.). Production estimates for quarters two through four have also been revised up by 1.5%-2%. Not surprisingly, the report cites heavier carcass weights as accounting for much of the adjustment, with the larger first-quarter adjustment also reflecting higher cow slaughter.
Perhaps more significantly, the WASDE report also shows changing expectations regarding competing meat supplies. While first-quarter hog production estimates are now slightly lower (less than one-half of 1%) than they were last November, estimates for quarters two through four have been raised by 2%-4%, with the biggest change applying to fourth-quarter forecasts. Broiler production forecasts have also been ratcheted up. The forecast for second-quarter broiler production in the WASDE was more than 350 million lb. larger than the forecast in the December WASDE — an increase of about 4%. The third-quarter broiler production forecast is up almost 3% from the December figure.
These evolving market expectations highlight a real challenge for the beef industry. While beef production forecasts have been bumped up in recent months, production will still be down substantially from 2012 levels. It will almost certainly decline further in 2014 as herd rebuilding removes females from the market. Meanwhile, pork and broiler production are back to modest expansion, capitalizing on historically high meat prices and what everyone hopes will be moderating feed prices as this year’s grain crop progresses. These guys are very tough competition — competition that can put a real limit on beef’s upside price potential in a steady (or weak) demand environment.
Editor’s Note: John Anderson is deputy chief economist for the American Farm Bureau Federation. “In the Cattle Markets” is a column posted by the K-State/Livestock Marketing Information Center (LMIC) available at www.agmanager.info/livestock/marketing/outlook/newsletters/default.asp.
