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2012 looks bright for cattle business

A combination of fewer downside price risks stemming from factors like a gradual tightening of beef supplies and more upside potential through population growth and increased protein demands will likely add up to a strong cattle market throughout 2012, according to a new outlook from Rabobank released Wednesday.

"2012 will be another year of record high cattle and beef prices with diverging impacts for various segments of the industry," says Rabobank economist David Nelson. "Ranchers will benefit from scarce cattle supplies while feedlots and packers face challenges."

That's not to say it will be smooth sailing all year; in the first quarter, a winter "supply bulge" could incite volatility on increased downside potential. And, until that supply's worked through, things could tighten, Nelson says.

"Rabobank expects a slightly larger global supply amidst a backdrop of slowing winter demand in the Northern Hemisphere," he says. "However, for the rest of the year cattle prices should post record highs as markets transition from the short term supply bulge (primarily U.S. and Brazil) to materially lower supplies."

Exascerbating that supply situation will be the strong size of the 2009 and 2010 calf crops. But, by the time the first quarter of the year is out, increased demand -- namely on the export market -- should work through that larger supply, Nelson says.

"This increase in supply coupled with an anticipated deceleration in domestic consumption should push cattle prices down," he says of the first quarter of 2012. "However, a possible increase in beef exports reduces the likelihood of a more significant decrease in prices."

The report also shows:

  • Fed cattle and Choice cut-outs hit record-high prices in the fourth quarter of 2011. "The 6-week rolling average for slaughter fell from 653,000 head at the beginning of Q4 to 608,000 head for the week ending December 31, which is 1.5% below year-ago levels," Nelson says. "Packing margins have yet to respond positively. Reduced slaughter levels will have to be maintained to get packing margins back in the black."

  • The choice-select spread widened in the fourth quarter. This is mainly because Wal-Mart started selling USDA Choice beef. This took the spread from $7 to $20, "a level not seen since 2006," Nelson says. "The spread is likely to remain at historically wide levels with Wal-Mart's ongoing demand."

  • U.S. beef exports were strong in Q4. "Year-to-date export volume is up 25% over 2012 levels, led by exports to Canada and Mexico," Nelson says. "A still relatively weak U.S. Dollar relative to other major exporters also helped drive strong exports to Japan and South Korea."

  • Drought in the southern U.S. kept feedlot-placed cattle on the lighter side. Placements were higher, but because of their weight, the lighter feeders will help keep a wide choice-select spread. "These light cattle are less likely to grade choice than heavy cattle, supporting the choice-select spread well into 2012," Nelson says.

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