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Published July 05, 2011, 12:27 PM

Looking into the beef market

Greece’s parliament voted on an austerity package so the country could be handed another $12 billion toward its debt and keep it from defaulting on creditors, which would have affected several large U.S. banks and leading world banks.

Greece’s parliament voted on an austerity package so the country could be handed another $12 billion toward its debt and keep it from defaulting on creditors, which would have affected several large U.S. banks and leading world banks.

Many commodities markets rallied from their harsh break in June on end-of-the-month short covering and on optimism that the austerity package would pass. Psychologically, the passage of the austerity measure had an effect on many markets such as meats and grains.

After a $20.52 decline in price basis, the August fat cattle rallied back to $113.82 in two weeks. On the Fourth of July holiday, retailers thought that they would run specials at the meat counter, and that does not appear to be happening.

Hamburger prices have held strong even in the face of further cow liquidation. In the recent cold storage report, beef in cold storage showed the smallest decline from January to May in the last 10 years. Stocks fell 1.7 percent vs. a 14.9 percent decline for the same period a year ago. In fact, May stocks of beef in coolers was up 25 percent from May 2010. This year has seen a massive cow liquidation, partly because of extremely high cow prices for the grind demand and a major drought throughout the Southwest. This has helped with the jump of cooler supplies.

The dollar has come to play a hand in this as well. A dollar in decline has altered the amount of Australian beef exported to the United States. Australian beef imports are down 28.9 percent from a year ago and down 59 percent from 2009. In 2009, Australian beef shipments earned the country $1.50 for every $1 shipped. Today, the exchange rate is 95 cents for every dollar shipped. However, Australia has found other markets to sell to, such as Russia and Asia.

South Korea recently inked a deal with Canada for beef and that perhaps means less Canadian beef coming into the U.S. The Canadian dollar carries a premium to the U.S. dollar.

Then there is Argentina and Brazil. First, Argentina has dealt with droughts in recent years that decimated its pastures, and similar to in the U.S., animals are being liquidated.

In Brazil, between bad weather and growing economy, less beef was exported to take care of the domestic market. Both countries are in a growth phase. Imports from Brazil for the first four months of the year were down 90 percent while total cooked beef imports fell 54 percent from last year. This, too, has contributed to the overall value of U.S. cow and steer carcass values. The last time freezer stocks exploded was back in 1976. This was because of a change in the tax law that prompted a massive cow liquidation.

We may be on another verge of more cow liquidation because producers in Texas, New Mexico and parts of Kansas trying to haul water and feed to animals are finding that it is becoming too expensive. Forage is running short. We need to remember that domestic beef demand accounts for nearly 88 percent of the total market and the other 12 percent is vented toward exports, which remain strong. With high gas prices at a time of year when the weather accommodates travel, and a late start to the grilling season on the East Coast and the Midwest, domestic demand has been slowing. All these fundamentals could cause this market to pause again and slip into a trading range with the $106 to $107 range as the low side.

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