April 2012 Articles

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Caught in the Squeeze

Caught in the Squeeze Ross Pruitt, Department of Agricultural Economics and Agribusiness LSU AgCenter

In the March 5th In the Cattle Markets, the discussion focused on the tight packer margins that beef processors have faced this year. The live to cutout beef spread which accounts for the value of the beef and the byproducts (drop credit) less the cost of the finished animal stood at $73.82/head for the month of February. The last time the index was in the $70/head range on a consistent basis was in the early to mid 1990s. While far from the lowest on record, the spread for February 2012 was approximately half of the monthly per head average since 2001 and 20% lower than the average spread for the month of February dating back to 1987.
As Dr. Riley of Mississippi State noted, the challenge over the next few weeks will be for processors to increase the value of the beef cutout faster than the price of live cattle. This may be particularly difficult if the market has already experienced its seasonal peak for wholesale Choice boxed beef prices. While not typically reaching its peak until the middle of April, wholesale Choice boxed beef prices reached $198.51/cwt the first week of March and have since fallen indicating that the seasonal peak may have been reached. If the seasonal peak has already occurred, this would be the earliest the seasonal peak for Choice boxed beef has occurred in the past several years. In 2007, the boxed beef cutout peaked in the second full week of March, only to peak again a month later in April and neared the yearly high achieved in April the second week in May. The “triple peak” in 2007 was certainly an anomaly, but we could see something similar this year. Last year, the boxed beef price hits it seasonal high in the first week of April and declined in value until mid June. From that point in June, the choice cutout rose steadily the rest of the year and largely continued that growth through the first few weeks of this year.
The strength in cutout values experiences thus far in 2012 has been primarily a function of significantly lower slaughter rates and the resulting lower beef production. Through the first eight weeks of 2012, Federally inspected steer and heifer slaughter is 7.6% lower than the previous year and has resulted in beef production that is 4.3% lower through the first ten weeks of the year. While these levels have certainly helped to support both fed cattle and cutout prices, history suggests that slaughter levels will rise over the next couple of months as cattle placed last fall reach slaughter weight. This would seem to be particularly true this year as the 2011 drought forced many lightweight calves into the feedlots instead of additional time on pasture from July through November. During July through November, placements of cattle weighing less than 600 pounds were above levels seen over the past four to five years. In July 2011, placements of cattle weighing less than 600 pounds were 620,000 head (49% above July 2010) and those cattle would have started reaching slaughter weight towards the end of February. Those cattle placed weighing less than 600 pounds in August through November (which were above previous year levels) will start to reach slaughter weight at the end of this month through late June. Fed cattle marketings typically peak in June, but placement levels from July through November 2011 of light weight cattle may alter this pattern for 2012. This will place additional price pressure on boxed beef prices as more cattle are seasonally available, what processors are willing to pay for cattle, and, ultimately, the live to cutout spread. The live to cutout spread normally increases in April through July and will ease some of the losses that processors have likely endured over the past few months. How much relief processors receive will come down to how well they are able to keep the price of boxed beef increasing faster than the price of fed cattle.
For those producers that have retained ownership through the feedlots, keep an eye on wholesale beef prices over the next few weeks. If your cattle are nearing slaughter weight, the cutout price will be an important indicator of how quickly prices will seasonally decline for fed cattle. The tightness of feeder cattle supplies limits the downside risk, but there is still risk present in this market, especially if gas prices continue to move higher, or at least remain steady. This will divert disposable income from higher priced beef toward cheaper substitutes and other family necessities.