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Cattle prices respond to economic changes

06/09/2006 @ 3:05pm

The recent rebound in cattle prices has been somewhat of a surprise, considering big inventory numbers for the May/June time window were expected to keep prices suppressed.

However, when analyzing cattle prices over the last three months, the basic laws of economics seem to have once again prevailed.

Cattle prices were in a steep downtrend from early January until the end of April. In May, prices corrected by moving higher, but a significant rebound was not expected. However, prices have rallied more than $6.00 in the live market, and feeder cattle prices have had even a stronger move, rallying $8.00 to $10.00. What were the forces behind the rebound?

First, the weight of marketed animals moved downward by as much as 20 pounds. Lower prices and a discounted futures price to cash left feedlots with little or no incentive to add extra weight. In addition, with corn prices rallying, feed costs increased. Therefore, while the number of market-ready animals remained large, decreasing poundage was a big benefit to help reduce inventory issues.

On the other side of the coin, demand increased after prices slid. In other words, basic market forces came into play. As prices declined, quantity demanded increased. Evidence of improving demand may have been partially represented in the spread difference between choice and select cuts. Choice cuts from heavier animals will often trade close to or equal to the same value as select cuts when there are ample supplies of market-ready animals. However, when feedlots become current and the availability of choice animals decreases, often the spread differential between the cuts widens. This was another sign that feedlots were current and cattle prices could rebound.

In summary, declining prices led to increased demand. Declining prices also encouraged producers to stay more current. It appears the cattle market has been a typical economic model representing changes by both consumers and producers.

If you have any questions, contact Top Farmer at 1-800-TOP-FARM, ext. 129.

The recent rebound in cattle prices has been somewhat of a surprise, considering big inventory numbers for the May/June time window were expected to keep prices suppressed.