Source: John D. Anderson, Deputy Chief Economist, American Farm Bureau Federation
Much of the conversation in the cattle market over the last several months (years, even) has focused on declining cattle numbers and the supply-side support for prices that will characterize the market for the foreseeable future. The recent inventory report (discussed by Dr. Tonsor in last week’s ICM newsletter) provided confirmation of this decline in numbers. In the context of this fresh information on contracting cattle supplies, the behavior of cattle futures prices is worth noting.
In mid-December last year, the April Live Cattle contract on the CME traded as high as $138. The December contract got within about 50 cents of that level as well. These price expectations were largely based on expectations of tight meat supplies and continued slow but steady economic growth. However, since that mid-December peak, Live Cattle futures prices have dropped substantially. This week, the April contract has traded (briefly) below $128; and the December contract has traded down to around $130. This decline in Live Cattle prices has, of course, been accompanied by a decline in Feeder Cattle futures prices as well. So, why the deterioration in price expectations? The Cattle report just confirmed tighter numbers. Notwithstanding a dip in real GDP in the fourth quarter last year, other economic indicators are not really out of line with where they have been for many months and some (home prices, for example) have shown notable improvement – which should be firming up the demand side of expectations.
One thing that has changed considerably since late last year is expectations of total meat production in 2013. While smaller cattle inventories point to smaller beef production down the road, short-run expectations for beef production have been revised steadily higher since about last November. For example, last week’s World Agricultural Supply and Demand Estimates (WASDE) report from USDA included a forecast for first quarter beef production of just over 6.3 billion pounds. That’s nearly 4 percent higher than their 2013.Q1 forecast from last November (which was a bit less than 6.1 billion pounds). Production estimates for quarters two through four have also been revised up by 1.5 to 2 percent. Not surprisingly, the report cites heavier carcass weights as accounting for much of the adjustment, with the larger first quarter adjustment also reflecting higher cow slaughter.