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Kay’s Cuts: US markets search for stability

Steve Kay, US Cattle Buyers Weekly , 13/01/2016

Steve Kay 2013 conferenceA monthly column written exclusively for Beef Central by US market analyst, Steve Kay, publisher of US Cattle Buyers Weekly.

 

 

 

 

 

 

 

 

ALL in the US beef industry will be craving more market stability this year after one of the most volatile years ever experienced for grainfed cattle and wholesale beef prices.

The extreme volatility began with the futures market, which at times appeared to be totally divorced from market fundamentals (as noted in my previous column).

The volatility likely cost the industry hundreds of millions of dollars. For example, Tyson Foods’ beef segment incurred US $70 million of hedging losses in September, when the October live cattle contract lost US $20 per cwt. Tyson had hedged its forward beef sales against that contract.

Cow-calf producers accepted the reality that the remarkable returns enjoyed the past two years are now history.

The futures market, though, didn’t directly cause the volatility that pervaded the cattle and beef markets. A disturbing pattern was how boxed beef (cuts from grainfed cattle) prices had huge run-ups then equally large collapses. This occurred before and after each of the three biggest holiday weeks of the summer. It occurred again in November-December when prices collapsed (the US Choice grade cutout lost nearly US $24 per cwt in seven weeks) then exploded the last week of the year.

The collapse also forced cash grainfed cattle prices sharply lower. They lost just shy of US $20 per cwt in seven weeks. But they also then exploded, in large part because of severe winter weather in most of Cattle Feeding Country in states like Texas*. The result was an unprecedented US $18 per cwt rally in live cattle prices in two weeks.

No one benefits from these kinds of price swings. Retail and food service beef buyers don’t know how much beef to buy out front for fear of being caught on the wrong side of the market. That’s why the majority of beef each week is sold on a formula price basis. The swings last year also contributed to weaker than expected retail beef sales. Retailers were loath to lower their everyday prices because they would buy beef cheaper one month only to pay sharply higher prices the next. So retail prices stayed at record or near-record levels for much of the year.

Cattle feeders discovered that the money always runs out before the cattle.

The year taught the beef industry some further painful lessons. Cattle feeders discovered that the money always runs out before the cattle. Cattle feeders and packers realised that the shrinking cash grainfed cattle market demands urgent action or it will disappear.

Cow-calf producers accepted the reality that the remarkable returns enjoyed the past two years are now history. The biggest lesson though was the damage that record high wholesale and retail beef prices caused. Those prices made beef deeply uncompetitive with pork and chicken and even priced ground (minced) beef out of the reach of some consumers.

Beef suffered from a lack of competiveness all year and 2016 will see more of the same. Monthly retail prices (USDA’s All Beef price) in November were only 1.5pc higher than the year before. But pork prices were 3.4pc lower and chicken was 2pc lower. More important, the combined pork and chicken price was lower than the All Beef price.

Last year’s weakness in consumer spending on beef came despite massive consumer savings from lower energy costs. But consumers were unwilling to increase their spending on beef and instead elected to save and spend on durable goods such as autos, homes and home furnishings, says analyst Andrew Gottschalk, HedgersEdge.com.

The competition for the consumer dollar was more than competition within the meat complex. The competition was between food, savings and durable goods, he says.

The deeper issue is whether Americans have permanently adjusted their protein buying habits at the expense of beef. Americans continue to eat a record amount of chicken but that’s a function of availability. Consumers traded down in their beef purchasing during the Great Recession. Instead of buying steaks regularly, they bought more ground beef and less expensive cuts. The pattern has never gone away and consumers are still trading down from beef to pork and chicken.

New year brings fresh hope

A new year however brings fresh hopes. Cattle feeders will be desperate to stem their historic losses of 2015. Cash grainfed cattle prices rebounded over the holidays but only because of the weather. Higher prices will be necessary for at least the next two months just to offset the weight loss and much higher cost of gain caused by wretched feedlot conditions. It might take cattle feeders several years to recoup their 2015 losses.

Cow-calf operators saw lower returns in 2015 compared to 2014, and the pattern will be repeated this year. But returns might still be US$200 per cow. It’s worth remembering that returns often struggled in the US$50-100 range and that was while many producers also battled severe to extreme drought. Drought conditions have largely disappeared except in California so this year should be a good one.

The biggest hope will be that beef becomes more affordable. A projected 4.3pc increase in domestic US beef production from 2015 will be a start. But how much more aggressively retailers feature beef will be the key.

Already the signs are promising. Ground beef at US$1.99 per pound appeared to be history. But the Lucky supermarket chain in northern California put that price on 85CL lean ground beef over the holidays. I ran to the store to stock up, and I hope others did as well.

 

* Reports out of the US this week suggest severe winter storms have killed thousands of dairy and beef cattle across areas including New Mexico, Texas and Oklahoma. Winter Storm Goliath caused losses estimated at around 30,000 dairy cattle in eastern New Mexico and western Texas, representing a 5pc death loss rate. Much less news has been reported so far on feedlot losses, partly due to access difficulty, however one source estimated only about 2500 head of cattle were lost in impacted feedlots. Although the winter weather is extremely hard on the producers and cattle it affected, it has probably lent some support to the recent uptick in prices on the cash and futures side of the cattle market, analysts said.

 

 

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