Chicago and corn are driving the U.S. live cattle market. Each is pushing futures prices higher. That has meant higher cash prices this winter on both sides of the border. The commodity pits at the Chicago Mercantile Exchange aren’t totally dominated by the commodity funds, but it seems that way. There have been numerous times when futures prices have gone higher despite slightly negative fundamentals because of fund buying. As cash and futures corn prices also ratchet higher, funds seem even more inclined to buy more live cattle contracts.
The logic that live cattle prices must go higher in the face of higher feed costs ignores the fact that higher cattle prices might eventually impact beef demand. Packers have done an impressive job in the past two years managing the price spread between live cattle and boxed (fed) beef. They made record or near-record profits in 2010. They are not about to give up their margins just because the futures (at least in mid-February) say they will have to pay $113 to $119 per cwt for cattle the rest of the year.
Packers will do their utmost to raise boxed beef prices to cover additional cattle costs. This means the Choice cutout will have to trade between $180 and $200 per cwt the rest of the year. That was difficult to envision in mid-February when the cutout was below $170. But February and March are the two weakest beef-demand months of the year in the U.S. However, it will take a $20 rally in March and April to get boxed beef prices back in balance with expected live cattle prices.
Then comes two big questions. If packers sell beef this much higher, by how much will retailers and foodservice operators raise their prices for consumers? What effect will this have on beef sales in grocery stores and restaurants? Some packers hope that if retail prices rise as expected, consumers will accept higher beef prices just as they have accepted higher prices at the gas pump.
Both gas and beef might be regarded as staples for Americans. But there’s a huge difference between the two. The only alternative to buying gas is to drive less. But consumers have cheaper pork and poultry to turn to. Chicken will be in plentiful supply this year. It is the only one of the major proteins whose available supply on a per capita basis will increase this year from 2010. Chicken looked to be filling the “protein hole” anyway, with beef and pork supplies down. Should beef prices go sharply higher, consumers will buy less beef and more chicken.
Meanwhile, the second-tightest ending corn stocks since the Dust Bowl era forced corn futures prices above $7 per bushel last month for the first time since July 2008. Futures prices have now risen 97 per cent since last June and are having a profound impact on cattle feeding breakevens. USDA’s latest corn shock came when it lowered its estimate of corn ending stocks to 675 million bushels from its January estimate of 745 million bushels. This represents only five per cent of annual corn usage or just 18 days supply at current usage estimates. The ratio equals the low set in 1995-96 and is just above the 4.5 per cent set in 1937. Analysts are already forecasting that this record will soon be beaten.
Much of the reduction in ending stocks came because USDA raised its estimate of ethanol production’s corn usage by 50 million bushels. Yet analysts believe the ethanol industry’s corn usage is still understated. Corn prices will likely go even higher, which will eventually exacerbate food inflation in the U.S.
Packers are not about to give up their margins just because the futures say they will have to pay $113 to $119 per cwt for cattle the rest of the year