Prepared by Hales Cattle Letter
In This Issue
- Record high cutout prices with record high natural gas prices set stage for a major price correction.
- Carcass weights stable, but headed lower.
- Drop credit continues to move higher.
- Futures may stay par or at a slight discount to fed steer prices.
(January 5, 2001) In the chart, the weekly average choice cutout price is shown for the first week in January each year since 1987. This year the weekly average choice cutout price reached a new high of $132.10 during the first week of January. The last time the price was above $130 was in May of 1993 when the peak was $130.06. Prior to that the all time high was set in December of 1990 when the price peaked at $130.21. After the peak in 1990, the cutout price dropped to $122.53 by the end of January 1991 and the fed price dropped to $78 from $82. The marketplace expects a similar break this year once full weekly kills begin.
Weekly Average Choice Cutout Price
Average weekly cattle slaughter in December of 1990 was about 574,000 head with January and February slaughter at about 603,000 head. December of 2000 saw slaughter average about 630,000 head with an average of about 673,000 head expected in January and February of 2001. Imagine where prices would be now if the kill in December had been like 1990!
Similar patterns exist between 1990 and 2000, as well as 1991 and 2001, except for the war. Anyone remember Desert Storm?
Weights Down 14 Pounds
Steer carcass weights were 14 pounds below the fall high as of the week ending December 22, 2000. In both 1998 and 1999 steer carcass weights fell only five pounds from the fall high through the same week in December. At 800 pounds, the steer carcass weight is the same as 1998 and 1999, but eight pounds above the three-year average.
Steer Carcass Weight
Major cattle feeding areas are expected to experience a warming trend through the middle of January, but forecasters expect another surge of extremely cold air late in the month. This winter has already had a much greater impact on cattle performance and weights than the last two. Each week fewer heavy fed yearlings and more fed calves will be slaughtered which will impact weights significantly. As a result, look for steer carcass weights to plunge below the three-year average by early February.
Hide And Offal Values $1.30 Above Last Year
Starting out this year at $9.04, hide and offal prices are $1.30 above last year which is the third highest price in the last 10 years. As the industry moves forward, total slaughter will fall below a year ago putting a new upward pressure on drop credits. By this time next year, hide and offal prices could make new highs which will help packers cope with a renewed squeeze on margins.
Weekly Hide And Offal Value
Basis Slightly Better Than Recent Years
Attitudes about the future have changed significantly during recent weeks. A cold November and even colder December with a record high natural gas price is causing heating bills to double or triple in some areas. Fear is developing in the market that discretionary income will suffer as a result of the high heating costs and cause consumers to switch from expensive beef to cheaper pork or poultry. Anecdotal evidence indicates that retailers are beginning to switch weekly features from beef to pork and poultry because margins are much better.
Texas Panhandle Nearby Steer Basis
All these factors are having a negative impact on February futures. As a result, February futures are expected to move to a discount to fed steer prices and stay discount through January. A hedger's delight that will enhance marketings and soften fed prices as weak futures and cash feed off of each other.
Outlook
Bearish factors:
1. Record high cutout prices with fed supplies expected to increase in January and February.
2. Record high natural gas prices forcing heating costs to soar. Many cities report heating bills doubled from last year and the winter is only three weeks old. Increasing heating bills may reduce consumption of expensive beef if cheaper pork and poultry is available.
3. Pork and poultry are both significantly cheaper than beef at this time. Retail beef prices do not reflect this week's record high cutout price. Retailers are reported to be shifting from beef to pork and poultry features in January.
Bullish factors:
1. Fewer heavy yearlings and more calves were placed on feed during the last three months. Weather that has forced natural gas prices up has also taken pounds off feedlot cattle. As a result, carcass weights are below last year and are expected to fall below the three-year average.
2. Lighter cattle fed through a bad winter finish at different times with marketings strung out over a longer time period than yearlings suffering the same winter. On feed totals of 103% doesn't indicate marketings of 103%. If the weather is severe enough, marketings might only be 95% over a longer time frame.
3. Demand for beef has been exceptional. Even though the economy is suffering, demand may stay stronger than expected. Medical reports concerning what is healthy for people to eat have changed so many times that people are confused and sick of hearing about them. People appear to have thrown the diet out the window.
4. Hid and offal prices are strong and do not show any signs of weakness. Declining slaughter later this year should keep hide prices strong.
Fed cattle prices are expected to fall back to the $74-$75 area by the
first week of February. Weekly average choice cutout prices are expected
to fall back to the $120 area by late January of early February. However,
prices are expected to make new highs later in the spring.