There are weather markets, and then there are weather markets. This summer, with weather representing just one uncertain element in an already unstable beef-production sector, the market is setting new standards for volatility.
During June, news of Corn Belt floods and planting delays sent corn cash and futures prices soaring from already high levels. At the same time, drought in some areas coupled with rapidly escalating production costs fueled speculation that beef production would drop significantly this fall and into 2009. The futures market responded with live-cattle futures reaching new highs, particularly the deferred contracts next spring, which peaked near $120.
Healthy domestic demand and a growing export market for U.S. beef added support for prices, with Choice boxed-beef values averaging over $170 per hundredweight through the first half of July. Those prices allowed packers some of their first positive margins in months, and fed-cattle prices gained about $7 per hundredweight over two weeks, topping $100 per hundredweight in early July.
Then, as hot July weather set in around the country, several consecutive USDA Crop Progress reports indicated the condition of the nation’s corn crop was improving. Each week showed a slightly higher percentage of fields in good-to-excellent condition, with the average about on par with last year’s. Crop maturity, as of late July, remained well behind normal, creating some concern over an early frost, but overall, the market began to feel more optimistic about this year’s corn crop.
That little bit of optimism had an effect in the cattle markets, with fed cattle pulling back into the upper $90s and deferred live-cattle futures loosing $6 to $8 during the first three weeks of July, on ideas beef production might not decline as much as anticipated.
The cattle market likely will remain uncertain through this fall, as continued volatility in grain and energy markets weighs on the outlook for beef production. Nevertheless, market fundamentals continue to suggest fed-cattle prices will strengthen considerably this fall and into 2009. U.S. feedyard inventories are at historically low levels for this time of year, and the nation’s cow herd continues to contract.
Weakness in the U.S. dollar and growing global demand for animal proteins drove beef exports during May more than 32 percent over those during May 2007. For the January through May time period, beef exports topped those during the same time last year by 32.6 percent. According to University of Missouri economists Glenn Grimes and Ron Plain, beef exports added $78.68 to the value of each animal slaughtered during May, and beef variety meats added another $19.72 per head, for a total of $98.40 per animal slaughtered.
The tenuous return of U.S. beef to the South Korean market should bring further gains in export tonnage and value through the second half of this year. Continued growth in global demand for grain-finished beef, coupled with continued reductions in U.S. beef production, mean significant up-side potential for fed-cattle prices in the long term.