In the face of large feedyard inventories and growing beef supplies, fed-cattle prices held up well through the first half of this summer. Slaughter weights during the spring months ran well below year-ago averages, and the Choice/Select spread widened to as much as $20 per hundredweight, indicating that owners were marketing cattle earlier rather than later.

As of mid-June, year-to-date cattle slaughter and beef production were down from last year, 4 percent and 5 percent respectively. Beef in cold storage was down 17.7 percent from year-ago levels. The average retail price of Choice beef set a record in May for the fifth consecutive month.

Feedyards have continued placing cattle aggressively, though, and market signals now suggest that supplies could become burdensome. As of June 1, feedyard inventories remained 2 percent larger than one year earlier, and May placements exceeded the May 2000 pace by 3 percent. Marketings of fed cattle during May topped the year-earlier figure by 1 percent, but at 2.20 million head, fell short of the 2.37 million head that feedyards placed during May.

With supplies of market-ready cattle growing larger and beef cutout prices declining, packers have pushed live-cattle prices lower. Cattle feeders have resisted the lower prices, looking for a quick recovery, and it appears that a backlog of finished cattle could develop.

Slaughter weights increased significantly during May and June, and market conditions including cheap corn and expensive replacement cattle encouraged feedyards to feed pens longer and market them heavier. The Choice/Select spread also has narrowed considerably, indicating that cattle are staying in feedyards longer with a higher percentage reaching the Choice grade.

The international market for U.S. beef has not been as strong as hoped, with higher beef prices and a strong dollar driving exports down almost 13 percent during the first quarter of 2001.

Grain prices remain favorable, but producers and analysts will watch the weather and progress reports closely for the rest of the growing season. With projections of shorter crops and strong demand, there is some upside risk in the grain market.

The outlook remains favorable for a strong recovery in fed-cattle prices this fall, once the market works through the current glut and feedyard inventories finally drop below year-ago levels. Prices likely will hold in the low $70s through the summer months, then climb back toward the year's highs during the fourth quarter. But the timing and the strength of that recovery will depend largely on this summer's marketing activity. If a serious backlog of finished cattle develops, heavier slaughter weights could make up for modest reductions in numbers and limit the strength of the recovery.