April 19, 2012
Drought conditions in the Southern Plains and Southwestern of the US appear to be moderating as La Niña transitions into a more normal weather pattern, and - along with expectations for more normal yields - prospects for pasture availability in 2012 are improving.
However, there is anecdotal evidence that Southern and Southwestern cattlemen are hedging their bets by buying stockers rather than cows to graze this summer. This strategy could also serve to reduce grazing pressure on drought-damaged pastures, allowing pasture plants a chance to recover from 2011 drought effects. By restocking with stockers rather than cows, cattlemen are effectively delaying the rebuilding of national cow inventories compared with the timing originally anticipated. The heavy rate of cow slaughter observed during the first quarter of 2012 will also affect the calf crop in 2012, likely to be down slightly as a result, and could also adversely affect the January 1, 2013, total cow inventory, which - combined with the relatively low increase in heifers expected to calve in 2012 - could also be down slightly from the already low inventories. Further, a smaller calf crop in 2012 would likely result in fewer feeder cattle available for placement on feed in 2013 and potentially lower beef production in 2013 and early 2014. This will be exacerbated to the extent that producers keep heifers from the 2012 calf crop for herd replacements or herd rebuilding.
The direction Choice and Select cutout values will take in the near term is uncertain and will partially depend on the extent of the impact on the whole beef sector of current negative consumer responses to lean finely-textured beef (LFTB). According to industry and analysts' estimates, LFTB contributed 3% to 6% of total lean beef supplies. If producers of ground beef products move away from using LFTB, they will need to find alternative lean beef sources or other substitutes to replace it in final products. With cow inventories at low levels, cow slaughter - a primary source of lean beef for ground products - is expected to decline and likely lead to higher cow prices and prices for lean processing beef. However, higher cow prices could provide incentive to slaughter cows rather than keeping them for breeding, which will lead to a short-term increase in lean beef supplies at the expense of rebuilding the herd and increasing beef supplies in a longer two to three year time horizon.
If demand for lean processing beef strengthens, prices for imported beef - the primary alternative source for lean processing beef - may also increase because of general low worldwide supplies of beef available for export. In addition to generally weaker wholesale beef prices, prices for 50% lean trim have declined sharply, in large part because the reduced production of LFTB lessened the need for those portions of 50% trim used to produce LFTB and to blend with LFTB to produce ground products. As a result, prices for 50% trim have declined by 50% from March 1 through April 9, 2012.
Current retail prices for beef and beef products have met with consumer resistance. While high in relative terms, retail prices are not providing margins down the chain that support the cattle feeding and packer sectors. With packers caught in an intense squeeze between the cost of fed cattle and wholesale cut-out values, either cut-out values will have to increase - pressuring retailer margins or resulting in higher retail beef prices, and counter to recent price movements - or fed cattle prices will have to remain relatively weak compared with the past quarter. Lower fed cattle prices will continue to squeeze cattle feeders' profit margins.
