A monthly column written exclusively for Beef Central by US market commentator, Steve Kay, publisher of US Catle Buyers Weekly  

Remember what it was like to ride the roller-coaster at the theme park? The thrill of anticipation intensifies as you reach the top of the ride, then you hurtle down the other side with your stomach churning. You stagger off to terra firma muttering that you’ll never do that again.

That’s a bit what US beef packers who produce grain-fed beef and sellers of fed cattle are feeling like. For the past six weeks has seen the wildest roller-coaster of a wholesale beef and fed cattle market since October in 2003.

The rally in fed cattle prices began in what looked like being a quiet Christmas holiday week. But packers suddenly paid a lot more for cattle (a weekly record at the time of US $134.22 per cwt). Then they did it over and over for the next four weeks, pushing prices to $148.22 per cwt. That’s exactly $14 more in five weeks. But what goes up must come down and prices have since retreated, to $140.62 the week ended February 7.

Still, that’s far higher than anyone could have imagined for early February and far above the futures markets prices that had to be dragged higher by the explosion in cash prices.

The wholesale beef market began its rally a week or so after fed cattle. The rally involved or cutout values, a daily composite of the values of seven sub-primals from fed cattle and several dozen individual cuts within those sub-primals. USDA reports the cutout values for both Choice- and Select-graded beef.

The Choice cutout on January 1 was at $200.55 per cwt and the Select cutout was at $196.05 per cwt. By January 22, they had gained $39.65 per cwt and $41.39 per cwt, respectively.

Retailers under-estimated the impact of two holiday weeks that produced less beef than usual because of the way the holidays fell. Grocery store beef sales surged in the days before Christmas and buyers were caught very short-bought. In turn, packers got short-bought on fed cattle over the holidays as well. Both they and retail beef buyers spent the next three weeks forced to pay whatever it took to replenish their inventories.

But having done this, beef buyers disappeared off the market and the retreat in boxed beef prices began with a vengeance. By February 7, the Choice cutout had fallen to $210.77 and the Select cutout had fallen to $209.19. The rapid decline forced fed beef processors to drastically reduce their kills in an attempt to slow the slide. The estimated slaughter (including cows) the week ended February 1 was the smallest non-holiday kill since 1999, and the kill last week was even smaller.

The consequences of the rally in boxed beef prices will play out over the next two months. Grocery chains will be hard-pressed to feature beef in February and March. They did a great job in January but that’s because prices in November and early December allowed them to do so. But we likely saw the last of their aggressive beef features the first weekend of February. Beef features will now be relegated to the inside pages of their fliers and might virtually disappear in March.

In addition, retailers’ beef margins disappeared and they are raising their everyday beef prices as a result. So the beef market’s Number One issue is: How will Americans respond to these higher prices and far fewer beef items on feature? How will overseas buyers of U.S. beef respond as well? People will still buy beef. But reduced sales will force packers will run at their most reduced production levels in February for many years.

Producers remain reluctant to expand

Meanwhile, USDA’s annual cattle inventory report showed that US cow-calf producers still have little appetite for expanding their herds. The report confirmed that the total herd shrank again in 2013, by 1.570 million head, to its smallest total since 1951. Beef cow numbers in 2013 declined by 264,000 head, following a loss of 863,000 head in 2012.  The 2013 calf crop was the smallest since 1949.

Perhaps the most important number was that beef cow replacements increased only 90,200 head from the year before. Analysts had forecast this number to be almost double that. Cow-calf producers a year ago said they intended to hold back 100,000 more heifers than the year before. But they sold all these. So the modest intended increase this year might end up meaning little or no herd expansion, as drought continues to impact several large cow-calf states and all western states.

California, where I live, is in the grips of drought that threatens to be catastrophic. Its beef cow numbers declined only 10,000 head last year. They will certainly decline much more this year.

This and a decline in Mexican feeder cattle imports is why fourth largest beef company National Beef Packing announced January 31 that it will close its Brawley, California, beef processing plant April 4. Now the industry is bracing for more plant closures.