After a tough start to 2008, the past few weeks brought at least some positive bits of news to the fed-cattle market.
The first of these came on April 18, on what NCBA chief economist Greg Doud called “an historic billion-dollar day for the beef business,” when trade negotiators announced that South Korea would re-open its markets to U.S. beef in mid-May. Unlike prior agreements that only allowed boneless beef and led to Korea halting shipments over a few bone fragments, this pact allows bone-in beef and eventually should eliminate the “under-30-month” age limits.
According to Cattle-Fax analysts, restoration of beef exports to South Korea should increase the value of all fed cattle by $25 to $30 per head, with $12 to $15 per head resulting from the value added to short ribs, a popular cut in Korea that has much lower value here. Weakness in the U.S. dollar means South Korean consumers have more than 20 percent greater buying power for U.S. beef than they did before trade was suspended in 2003.
Trade officials also believe the agreement with South Korea will increase pressure on Japan and other beef-importing countries to relax their age requirements and open their markets to more U.S. beef products, including bone-in cuts, in compliance with standards from the World Organization for Animal Health.
Even before the news of the Korean trade agreement, cattle and beef prices were turning higher in response to seasonal demand and tighter supplies. Choice boxed-beef prices increased by more than $14 per hundredweight over the two weeks from April 4-18. In the week following the Korean trade agreement, the Choice cutout gained another $4.
In response to higher beef prices, packer bids also improved, and fed-cattle prices gained $4 to $5 per hundredweight through the first three weeks of April, and increased another $3 to $4 to around $93 per hundredweight during the week following the trade agreement.
Also on April 18, as the industry celebrated re-newed trade with Korea, USDA’s Cattle on Feed report offered additional positive news. On-feed inventories, at 11.7 million head as of April 1, were about equal with one year earlier, but March placements dropped off 11 percent from March 2007. Heavier cattle accounted for the majority of March placements, with 62 percent weighing more than 700 pounds. Feedlots marketed more cattle than they placed during March, although the total fell slightly short of those during the same month last year. Marketings picked up during April, with daily and weekly slaughter totals running well ahead of one year ago.
These trends point to tighter supplies of market-ready cattle in coming months, and the futures market has responded with deferred contracts up sharply during April, suggesting prices over $100 per hundredweight by October and December.
High production costs will continue to pressure feeding margins, and economic concerns could threaten growth in domestic demand. But it appears we have seen the market lows for 2008, and profits could return to cattle feeding during the second half of this year.