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CME: Concern About Beef Price Outlook Heading into Summer

17 June 2016

US - With just two weeks to go till expiration of the June futures contract, the basis is still around $6/cwt while the basis against the August contract is around $10/cwt. And this is using the very latest cash price as reported by USDA, write Steve Meyer and Len Steiner.

When using our regular cash benchmark (the 5-day avg) the basis would be even higher. For those that do not follow markets closely basis is the difference between the cash price and the price of the futures contract.

We will not wade into the minutia of basis calculations, which vary depending on what cash market you chose to track but, any way you look at it, current basis levels are at the highest in recent years.

The chart shows the basis for the August futures contract using the 5- day accumulated weighted average price (NW_LS410).

Over time this price has served us well as an indicator of cash market conditions. But, in the current environment, with big swings in prices seemingly daily, one also needs to be aware of more recent price points.

On Wednesday, for instance, USDA quoted the spot market at $123/cwt (LM_CT131), implying a basis of around $6 against the June futures contract and a basis of $10/cwt against the August contract. Normally the August contract basis narrows at this time of year, something that we have yet to see.

The situation in the beef complex remains quite uncertain and this is clearly reflected in the action of futures prices. While the beef cutout has been extremely firm so far, there is concern about the price outlook going into the summer months.

Buying for Father’s Day features was completed a few days ago and retailers also are wrapping up any last minute buys for the 4th of July.

So far the cutout has been greatly supported by the strong gains in the value of middle meats (steaks). The beef loin primal (items like sirloin steak, tenderloins and strips) was just a little over $305/cwt at the end of April.

On Monday of this week the value of the choice loin primal was calculated by USDA at $370.24/cwt. That shift in the value of the loin primal alone has added about $14 to the value of the choice cutout.

The rib primal also has traded very firm going into the late spring and early summer holidays, benefiting from the normal improvement in foodservice business, menu upgrades to capitalise on consumer demand for higher quality and increased retail features.

In late April and early May the value of the rib primal was calculated at $310/cwt but reached as high as $373/cwt earlier this week. The +$60 gain in the value of the rib primal added another $7 to the value of the cutout. But in the last two days both the rib and loin primals show signs of softening.

It is not unusual for middle meat prices to move lower into July and August. The question is by how much. If the loin and rib primals drop under $300/cwt by late July, would that cause a complete collapse in cutout values and justify current fed cattle values.

The short answer is, probably not. Those kind of prices for middle meats and trend values for rounds and chucks still would place the choice cutout around $200/cwt.

Even allowing for a healthy packer margin, this kind of cutout value would normally correlate with fed cattle values in the $120 area. Now if loins and ribs drop in the $250 range, then current futures implied fed values would start to make sense.

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