The holiday season is not usually the time when markets rally, but livestock expert Derrell Peel said 2013 was different.
Peel, extension livestock marketing specialist at Oklahoma State University, said fed cattle prices going into the Christmas holiday were slightly more than $130 per hundredweight but they emerged from New Year’s at more than $137 per hundredweight. He said this rally in fed cattle is already above spring prices as indicated by live cattle futures, but he doesn’t expect it to continue as packers will likely resist in the short term.
The recent rally is interesting given reduced slaughter schedules by major packers through the holiday period and a fire which idled production in a Cargill plant the same week.
Peel said choice boxed beef prices increased by roughly $4 per hundredweight since before Christmas, while select boxed beef prices rose $6, but even so that is not enough to compensate for the higher fed cattle prices which continue to squeeze packer margins.
He said boxed beef prices will have to move higher in concert with fed cattle prices before packers ramp up slaughter and production in 2014.
"Fed cattle prices today suggests that boxed beef prices need to be over $210 per hundredweight for packers to break even. Boxed beef markets are still several dollars away from that,” Peel noted in an email.
Beef packers like Tyson Foods and Cargill ended 2013 in the black with average margins of $4.06 per head for the year. This compared to losses of $2.25 per head in 2012, according to Sterling Beef Profit Tracker. Packers saw their margins dip into the red some $54 per head for the week ending Dec. 28, which led to reduced slaughter.
Peel reports cattle slaughter and boxed beef production have been down roughly 4% in the past month. Carcass weights are close to year ago levels, with steer and heifers carcass weights down and cow carcass weights up due to high proportions of dairy cows in the cow slaughter total.
He said it will likely take another week or longer to fully assess post-holiday beef markets. The massive winter storm affecting the eastern half of the country this week will have additional impacts on both beef supply and demand. Most major cattle feeding regions aren’t being affected by big snow totals but that is not the case throughout the corn belt toward the Northeast. Peel said heavy snow combined with brutally cold temperatures, will likely reduce beef demand and product movement for a few days throughout much of the country.
“Because of reduced cattle numbers, I expect cattle slaughter to decrease 7% in 2014. Depending on carcass weights, that will translate into a 6.5% decrease in beef production,” Peel said.
While he predicts wholesale prices will be higher (revenue for packers), he said there is more uncertainty about how fast those prices will adjust. He said fed cattle prices are already high and will likely move up, so packers are apt to face a margin squeeze well into 2014.
“An individual packer might further reduce slaughter in an attempt to either push boxed beef prices higher or fed cattle prices lower but that is a very short term action (a few days at most). Packers will be struggling for volume so they won’t be very inclined to do this much or for very long,” Peel said.
Across the board, Peel expects to see higher beef prices in 2014. Beef industry economists worry that higher beef prices will further reduce consumption which has been on a steady decline since it peaked in the mid 1970s.
A report by Priceonomics indicates U.S. beef consumption dipped to 55 pounds per person in 2012, falling behind poultry’s 59 pounds per person that same year. Since the mid-1970’s beef consumption has declined by more 20 pounds per person, while chicken consumption increased that much.
Peel said cow-calf producers are in the driver’s seat because they control supply and will be making decisions about rebuilding the herd. While the high price level likely means a margin squeeze at the feedlot and packing sectors, it likely means record cow-calf profits in 2014.