Higher Beef Prices Expected Next Year
Monday, August 29th, 2011
Live-cattle futures look primed to rally-once the industry bucks swelling supply.
The U.S. beef industry is currently dealing with the effects of a severe drought concentrated in the southern U.S. Plains. Ranchers across states such as Texas and Oklahoma are liquidating their herds at historically high rates, as grazing lands and water supplies dry up. That's expected to swell beef supplies in the near term, and keep a lid on live-cattle futures at the Chicago Mercantile Exchange - for now.
But to the chagrin of steak lovers, the glut of beef isn't likely to last.
Starting next year, supplies of slaughter-ready cattle should tighten, providing fuel for prices. Ranchers, who have shrunk their herds, will be left with fewer animals to sell. And since they've been selling off large numbers of young females, or heifers, many will have a smaller breeding herd to rebuild supplies.
"As we go into 2012 and 2013, we're seeing tighter and tighter supplies of valuable cattle to produce beef in this country," says John Nalivka, an economist at Sterling Marketing, an agricultural-advisory firm in Vale, Ore. "The fact is, we've continued to reduce the inventory, and we haven't been building herds."
If corn prices remain high into next year, beef supplies could tighten further. That's because feedlots where cattle are fattened before slaughter will trim their feed rations for animals, resulting in smaller animals. Higher feed costs also will discourage cattle producers from growing their herds and will saddle them with more mouths to feed.
Prices for live-cattle futures are reflecting the boom and bust in supplies. Live cattle for delivery in April closed Friday at $1.248 a pound, 8.3% above the contract for October delivery. Futures for fall delivery have sold off by more than 5% in the last ten days, as traders have adjusted to a report from the U.S. Department of Agriculture noting that 22% more cattle were moved from grazing land to feedlots in July than a year ago.
Due to soaring exports of U.S. beef, futures contracts for delivery this year aren't likely to fall much further. Export shipments of U.S. beef are up 25% for the year through June, and the USDA expects beef exports to keep rising for the rest of year and into 2012, as countries such as South Korea, Japan and Mexico gorge on American beef.
Beef is flowing quickly from U.S. shores thanks to a mix of steadily climbing grain prices and prolonged weakness in the U.S. dollar, due in large part to the Federal Reserve's efforts to stabilize the U.S. economy: A weak greenback makes U.S. meat look comparatively cheap abroad.
Come spring, slaughter rates could fall by as much as 5% below the level a year earlier, as there are fewer animals to kill. Each percentage point in the slaughter rate typically has a significant effect on supplies and prices. And the market already has shown considerable volatility this year, as front-month cattle futures hit all-time highs in early April, and retail-beef prices set records in July.
But those numbers may end up looking mild compared with 2012's, says Troy Vetterkind, president of Chicago-based Vetterkind Cattle Brokerage.
"Cattle prices are going to get pretty goofy-high next year," he said.