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CME: Beef Cutout Languished

09 January 2013

US - On Sunday the Wall Street Journal ran a story about the rally in live cattle futures and the record highs established by the nearby February live cattle contract, write Steve Meyer and Len Steiner.

At the bottom of this page, we have included the weekly production and price summary that is normally part of the Monday report. Some of the numbers in the report are published with a two week lag so keep that in mind when looking at the year to date totals.

As we have noted often in this report, tight cattle supplies are expected to propel beef and cattle prices in higher in the coming months, the big question is how quickly packers will be able to pass along the higher price of beef to their customers. The attached chart has been updated with the latest choice beef cutout values and the closing futures prices for live cattle. One can quickly see the problem with this picture. Even as live cash steer prices have moved higher in recent days, the beef cutout has languished.

On Tuesday afternoon, USDA quoted the choice beef cutout at $193.5/cwt, slightly lower than where it closed last Friday and just 2 per cent above year ago levels. It is not all that unusual for beef prices to be a bit soft at the outset of the new year. After all, consumers have been binging on roasts and turkeys over the holidays and generally take a break in January. To sustain cattle prices above the $130 threshold, however, we will need to see the cutout break over the $200 mark and then stay there, something that has been difficult to accomplish so far. At this point. packers appear to have trouble getting more money for items that seasonally should do well at this time of year, like chucks and rounds.

Retail demand is critical to push the cutout above the $200 threshold but so far, that has proved a tough nut to crack. In part this is due to lower prices for competing meats (negative for beef demand). Consider how dramatic the change has been at the retail case in the last three years. The price of choice regular trim beef insides currently is hovering around $225-$230/cwt, almost 40 per cent higher than what it was in January 2010, a consequence of high cattle values. On the other hand, the price of pork loins and chicken breasts is about the same as what it was three years ago.

Beef prices should move higher but only if the dramatic decline in beef supplies takes place. Steer weights continue to run about 2.3 per cent above year go at this point (see below), negating some of the impact of lower cattle numbers. Keep an eye on weights, they will dictate the pace of beef prices increases and ultimately how much packers will be willing / able to pay for cattle going forward.

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