Live cattle prices have had a great run in the last few months, with steer prices gaining 17% since the end of July. The USDA five market live steer price on November 14 closed at $126.17/cwt., a new all-time record high. Out front futures are indicating even higher prices for 2012. The increase in live cattle values has followed sharply higher wholesale beef prices as well as higher drop credits. Cattle on feed inventories may be larger than a year ago but the supply of market ready cattle has been relatively tight as feeders were placed at lower weights than normal. The calf crop in 2011 was the smallest in 50 years and an even smaller crop is expected in 2012. Very high feed costs have placed feedlots breakevens at the highest levels on record. Also strong export demand and higher prices for competing meats has bee supportive of wholesale beef prices to this point. Despite all the fundamentals arguing for a bull market for cattle and beef, market participants remain nervous. Grain prices have retreated from the record highs established in the summer and there is plenty of uncertainty in outside markets. The situation in Europe remains a concern as a possible breakup of the Euro Zone could push the global economy into recession and lead to significant volatility in currency markets. Also market participants continue to question the ability of domestic consumers to absorb the expected inflation in beef prices.

In this broad context, it is no wonder that markets are paying very close attention to even the smallest changes in wholesale beef prices. Live cattle futures pulled back on Tuesday and the decline was attributed to lower boxed beef prices. As the bottom chart shows, the choice beef cutout normally trends higher into the first week of December as retailers and foodservice operators prepare for the year end holidays. The fact that the cutout has been drifting lower in the last few days has some questioning the ability/willingness of packers to pay up for cattle. Market reports indicate that cattle trade has yet to develop for the week as asking prices are currently well above what packers are prepared to pay. If the choice cutout has hit a top of the year and prices are poised to be even lower by the third week of December, how low is low? Last year, the choice cutout declined about 3.7% once the Christmas buying was completed and the previous year the decline going into Christmas was about 4%. If a similar trend develops this year, we could be looking at a choice cutout in the mid 180s come December 10. And if you look at the top chart, that would imply live steer prices somewhere in the $120/cwt. area. Coincidentally, December futures closed last night at $120.575/cwt.