Prepared by Hales Cattle Letter
Choice-Select Spread Indicates Demand?
(May 12, 2000) Today's first chart shows the average price of the choice-select spread for January through the second week of May since 1987. Choice cutout prices have stayed at the widest premium in history to select cutout prices for the first four months of the year. Remember that this is a year virtually without a winter. Feedlot gains were excellent and grading should have been better than normal which would push the spread between choice and select back toward the $2 or $3 area instead of the $7 area.
Average Choice-Select Spread
The obvious reason for this unusual situation, and the one most discussed, is the decline in grading due to under finished cattle being slaughtered. It is more than just grading. It is a seasonal pattern that reflects an increase in demand for choice, usually for grilling at this time of year. However, the unusual width of the spread through the winter may be indicative of an increase in the inelastic demand for choice beef. During most of the last decade fat was out of style. Grocers began to trim the fat off beef, feature select or a house brand, and stayed away from choice. During the last decade, most stores in Amarillo, the center of Texas cattle feeding, did not offer a choice product. Now, most if not all offer choice and select goes begging. If there is an increase in the inelasticity of choice, what happens to fed cattle prices when beef production falls back to 450 million pounds a week from the current 500 million plus?
Weekly Cow Slaughter
June Futures Discount Expected Cash Break?
As a result of the increase in demand for choice beef, today's close in June futures at $68.25 is pricing a $67.00 fed steer during the week of first notice day, June 5 through 9. If fed steer prices break a dollar a week that makes prices $68.00 in June. With the contract a 55% choice contract and a choice-select spread at $15 or more, June futures should be about $1.50 above the fed price before deliveries start.
Will May Placements Fall?
Temperatures during May have stayed well above normal in most of the
graze-out wheat pasture area. Wheat has matured rapidly and is no longer
much good for pasture. Most cattle will be shipped by the end of next week.
Anecdotal evidence shows that numbers of graze-out wheat pasture cattle
were down about 40% to 50% from last year. If cattle move early as expected
and numbers were actually down, May placements could be significantly below
last year.