A monthly column written exclusively for Beef Central by Steve Kay, publisher of US Cattle Buyers Weekly
WHAT ails the US live (grainfed) cattle market?
That’s the question everyone on this side of the Pacific is currently asking. Cash live prices the third week of July put in what was expected to be the low for the summer at US$114.64c per cwt. Instead, prices fell from the second week of August to put in a new low of US $109.68/cwt last week.
Livestock and meat markets generally move in relation to supply and demand fundamentals. Tight supplies of cattle in the US, in the aftermath of the most severe and widespread drought in the US from 2010 to 2012 eventually pushed live cattle prices to a record high of US$171.38/cwt at the end of November 2014.
These prices clearly went too high. But no one could have foreseen at the start of this year that prices would fall to less than US$110. In fact, analysts that I surveyed forecast prices for the third quarter averaging as high as US$143/cwt, while the lowest forecast was US$128. Yet so far this quarter, prices have averaged US$116.40/cwt live.
Unless they rally dramatically the last three weeks of the quarter, they will likely not average above US$116. In fact, they could go lower because of an extremely negative futures market.
The October live cattle contract lost 475 points in a week in early September, and another 157 points Monday last week to close at US $100.02/cwt. It was inconceivable only a month ago that the contract could fall below US$100, but it might have done so by the time you read this.
It is tempting to accuse the futures market of dragging down cash prices. After all, it has been negative to the live cattle cash market for much of the year. But why it has gotten even more negative over the past month is a complete mystery.
The October contract on August 9 closed at US $115.00 and then went down every day but two to last Monday.
Nothing in the supply and demand fundamentals appears to justify this US$15 decline.
Total cattle slaughter year to date (to September 2) was up 832,000 head or 4.3pc on the same period last year. Beef production year to date is up 4.7pc on last year. Neither of these increases can explain why cash live cattle prices were down 22.6pc on the same week last year.
It also does not explain why wholesale beef prices have been 16pc to 20pc below year ago levels since May.
Neither does production of the competing meats justify such a huge decline. Hog slaughter year to date is up only 362,000 head or 0.5pc on last year, while pork production is 0.1pc below prior year levels. Chicken production is up 2.5pc year to date on last year.
Nothing on the demand side would suggest that cattle and wholesale beef prices should be this low. Overall retail beef prices for July averaged US$5.75 per pound, down 6.5pc from July last year.
Their 7c decline from June was the largest month-on-month decline since last December and prices for August were expected to decline by at least as much. August’s average retail feature price was US$4.97/lb, the first time it has dropped below US$5/lb since March 2014. Chicken’s average price in July at US$1.90/lb was down 3.1pc from last year, while pork’s price at US$3.78/lb was up 0.3pc.
The futures market thus appears to be far more negative than it should be, relative to the fundamentals.
This raises the question of whether supply and demand are so delicately balanced that any increase in meat and poultry supplies tips the scales disproportionately against livestock prices. Another question arises. Is there too much protein on the market for consumers in the US and abroad to eat their way through, and thus is the futures market attempting to warn about this?
Tough year ahead for US livestock producers
USDA’s latest cold storage report would suggest there is excess protein in the US, relative to consumption. Total meat and poultry supplies in cold storage in the US at the end of July were2.419billion pounds,2.8pchigher than a year ago and 9.7pc higher than the five-year average.
This was the largest July supply of meat and poultry in cold storage since 2002.
Chicken supplies were the most burdensome. They totaled 819.1 million pounds, 6.9pc higher than a year ago and 20pc higher than the five-year average. Next came pork at 600 million pounds. This was 5.3pc lower than the burdensome levels of a year earlier but was still 10.5pc higher than the five-year average.
Beef supplies totaled 469.3 million pounds, 2pc higher than a year ago and 8.3pc higher than the five-year average. Digging into the number revealed that there are plenty of pork bellies, chicken wings and chicken breasts waiting to find a home.
USDA forecasts that US red meat and poultry production for 2016 will total 97.61 billion pounds, up 3.1pc on 2015. More significantly, it forecasts 2017 production at 100.3 billion pounds, up another 2.8pc or 2.69 billion pounds. Chicken production will increase by a massive 1.06 billion pounds, beef production will increase by 838 million pounds and pork production will increase by just over 600 million pounds.
Next year will thus be even tougher for US livestock producers in terms of prices and profits.
The cheapest corn in several years (because of an expected record large crop this year) will help lower feed costs. But producers will be hoping that consumers at home and abroad eat even more American protein. Otherwise, one man’s meat will be another man’s poison.