U.S. cattle prices reached record levels during the first quarter of 2012, and the long-term outlook remains strong, but the market has hit a bit of a speed bump during the second quarter according to a new report from the Rabobank International Food & Agribusiness Research and Advisory group (FAR).
Several factors have contributed to the decline in cattle prices, including a modest increase in global supplies, particularly from Brazil, where herd expansion has been underway for several years. Brazilian cattle prices have declined by 5 percent since December as large numbers of cattle come to market, and the FAR report projects further declines during the second quarter. Prices for Brazilian beef are likely to increase later though, as international demand strengthens. Also, the authors note, cow slaughter in Brazil has increased in recent months due to low calf prices, suggesting some liquidation is underway.
Domestically, beef demand took a hit from the flap over lean, finely textured beef (LFTB), which has all but disappeared from the market as food service and grocery chains stopped using the product. The Rabobank analysts note that LFTB only accounted for about 2 percent of total U.S. beef volume, and much of the impact should fade within a few months. They also note, however, that processors have used LFTB, which averages about 95 percent lean, to increase the lean component in ground beef. Loss of the product likely will lead to an increase in beef imports to meet the demand for lean product for grinding.
In spite of cattle-on-feed numbers running somewhat higher than a year ago, packers have limited their slaughter numbers in response to poor margins, with federally inspected slaughter this year averaging about 6 percent lower than a year ago. At the same time, steer carcass weights have averaged about 20 pounds heavier than during the same period in 2011. Those heavier weights helped counteract some of the reduction in slaughter numbers, leading to a year-to-year reduction in U.S. beef production of 3.4 percent as of mid-April.
“Prices for U.S.-fed cattle should remain near $1.15 through mid-summer, before posting a sharp price recovery for the second half of the year,” says David Nelson, Global Strategist with Rabobank’s FAR group. “Restricted supplies and seasonal considerations should drive the price recovery.”
In the longer term, the analysts expect that global meat production, and especially beef, will fall short of international demand as expanding populations and rising incomes in emerging nations create growing markets for beef. These trends will support beef prices at higher levels, but also create price risk for processors and meat buyers.