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CME: Slaughter Price Puts Pressure on Spot Price

14 January 2013

Steer and heifer slaughter has bounced back after the holidays and this has put some pressure on spot wholesale beef prices, according to Steve Meyer and Len Steiner.

While beef prices are higher than a year ago, they will need to appreciate further considering the live cattle board prices for February ($131.22) and April ($134.77).

Indeed, the board has corrected significantly in the last two weeks, with the April contract down by more than 300 points compared to late December levels. As we have noted before, with steak cuts seasonally lower, the challenge will be to put more dollars on cuts that normally see an improvement in demand during cold weather, such as rounds and chucks.

So far that has been difficult, especially considering how much the value of the round and chuck primals needs to advance in order to sync up with the price of cattle being offered. Indeed, the performance of middle meats has been much better than expected.

Without that, the overall cutout value would likely be much smaller. Last night, the choice beef cutout closed at $193.80/cwt, about $7/cwt or 3.7 per cent higher than a year ago. However, the year over year increase in the value of the loin primal contributed about $4.6 to the overall increase while the rib primal was up $1.7.

The chuck and round primal are higher but only about 2 per cent from last year while items such brisket, short place and flank were all lower than a year ago.

One reason for the softer tone in items such as short plates is that export business so far remains fragile. While some markets continue to grow, exports to traditional Asian destinations, such as S. Korea and Japan, have not been as strong as expected.

Since December 1, weekly beef shipments to S. Korea have averaged about 8 per cent below year ago while exports to Japan have declined by 17 per cent. The Japanese market has been very soft, with weekly exports since October down 13 per cent.

Shipping beef to Japan is challenging, with the 21 month requirement limiting the supply and inflating prices.

Also, the volatile exchange rates have made trade extremely volatile. The value of the US dollar vs. the Japanese yen has gained ground and this has added to the price that Japanese buyers have to pay for US beef.

In early October, 100 Japanese Yen would buy you about $1.28 worth of US beef. Today, that same 100 Yen buys you $1.13 of US beef, a 12 per cent decline in purchasing power. In the meantime, cattle prices have jumped from about $123 in early October to about $128-129 today, a 5 per cent increase.

You add these together, and this does not bode well for exports to Japan. Markets like Russia, which appeared to show promise for growth, also are down as much as 46 per cent since November. Despite these challenges, some other markets, particularly in North America, have helped offset the decline in Asian business.

Since November, weekly shipments to Mexico have averaged 16 per cent above year ago while weekly exports to Canada have been 18 pe cent higher than last year. Egypt and Hong Kong continue to buy more beef from the US but those markets are vulnerable to competition from Brazil.

Bottom line: The expectation is for US cattle and beef prices to be higher in the coming months. The futures board shows that and analyst forecasts all have penciled in beef price inflation. However, that is predicated on the expectation that beef supplies will decline sharply (watch those weights) and that exports will continue to pull more beef out of the US (watch those currencies).

Daily Livestock Report - Copyright © 2008 CME. All rights reserved.

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