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Summer cattle outlook
Despite U.S. tight supplies, weaker economics could trump regular summer cattle market factors in 2012, putting pressure on the industry's seasonal price bounce.
Beginning in May-June, the industry sees the start of the market's bottom form. That price-bottom formation is helped by seasonal factors such as cattle hitting their prime growing season grazing on green pastures. Weather is a big market factor that drives the cattle market lower in the late spring/early summer time frame. How severe vs. how normal the weather is can help bounce the cattle market off its seasonal lows.
In the June-to-August time frame, U.S. beef demand could be curbed by higher gas prices, according to Kevin Penner, AgTrader Talk, LLC, cattle analyst.
Normally, the summer months offer a spike, as U.S. consumers grill steaks and other beef cuts. This helps trim supply, and it ignites a turn higher for cattle prices.
Market watchers still consider, as a major market factor, the devastating drought that Texas cattle producers endured last year, resulting in tight U.S. supplies. But weak economics is being equated to slower beef demand in 2012.
“If I had to point to one thing putting the brakes on cattle running back to $130 per hundredweight, it would be the higher gasoline prices,” Penner says. “If people are spending $4 to $4.50 per gallon on gasoline and it costs $120 to fill up their Ford Explorer this summer, they won't be buying steaks.”
Still, weather could play a big role on the direction of this summer's cattle market, Penner says. As the Texas agricultural industries recover from $7.62 billion of drought-stricken losses in 2011, all eyes will be focused on whether the southern Plains gets hit with a repeat inclement weather occurrence. As of this writing, close to 70% of Texas, the largest cattle-producing state, remained in severe drought or worse, according to federal statistics.
“If the cattle down there have to endure another summer like they did last year, that would become the major market driver. But the gasoline prices still weigh heavily on price potential.”
After hitting $128.92 per hundredweight on February 22 of this year, June cattle futures prices could test the $116- to $117-per-hundredweight level in the summer months, Penner says.
“I see the market bouncing back to $123, depending upon weather and gasoline prices,” he says.
On the low end (an ideal weather summer combined with cheaper gasoline prices and an improved economy), the June futures cattle contract could have a hard time rebounding to $120 per hundredweight, Penner says.
Because the futures and cash cattle markets have been maintaining convergence, the local auction cattle prices are expected to be closely tied in June, July, and August. A disconnect in the two markets could occur in the event that the industry can't get a handle on the pink slime controversy.
The elimination of lean, thinly processed beef, labeled as pink slime by critics, could be an added boost to cattle prices this summer.
“I'm hearing that the pink slime product made up 10% to 15% of U.S. ground beef. So if we're getting rid of that product, we have to fill that with choice and select cutouts. That should support beef prices. That will increase the demand of higher quality beef cuts from here on out,” Penner says.
And that part of the beef market could use the help. After hitting an 8½-month high in February, choice grade carcass prices had fallen nearly 7%, as of April.