Mad cows and the summer market

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COLUMBUS – As of Memorial Day it appears the U.S. cattle industry has dodged a bullet – U.S. beef consumers didn’t appear to flinch in response to the Canadian BSE (bovine spongiform encephalopathy) scare, according to Brian Roe, Ohio State University Extension livestock specialist.

Obviously, as the tangled trail of evidence unfolds in the continuing Canadian investigation, the possibility of outcomes harmful to U.S. cattle industry could be introduced, but the odds of this happening appear to be slim, he anticipated.

For those with cattle to sell during the next couple of months who are still wary of potentially demand busting events, June put option premiums fell sharply after Memorial Day and minimum prices in the lower $70s (futures) could be locked in.

If a highly negative BSE related event occurs, the value of the option would increase greatly and partially offset a cattle seller’s losses in the live cattle markets, Roe said.

Unfazed. If demand remains unfazed by the event, U.S. feedlots will benefit from the temporary ban on the movement of cattle and beef from Canada, he said.

The key question is how long will this ban last.

Many market observers have noted that Canadian cattle imports account for about of 4 percent of all cattle slaughtered in the United States each year and that Canadian beef imports are equivalent to about 4 percent of all U.S. beef production.

However, these figures are a bit misleading as they smooth out seasonal differences, Roe said.

The ban is likely to extend for June and maybe July and August. Historically, June is a low month for Canadian live cattle imports.

In June 2002, for example, Canadian slaughter cattle imports accounted for only 2.8 percent of U.S. slaughter and Canadian feeder cattle imports accounted for only 0.6 percent of U.S. feeder cattle sales.

Canadian beef imports were about average during June 2002 and June 2001, however.

Hence, the demand boost from the ban will be a little weaker than what most analysts who have used annual statistics have predicted, Roe said.

Feeder cattle markets. In particular, there should be little impact on feeder cattle markets so long as the ban does not extend past July.

Canadian imports of feeder cattle account for less than 1 percent of the market during June and July. If the ban extends into August and September, however, feeder cattle prices could experience a noticeable boost.

In 2002, Canadian imports accounted for 2.4 percent and 3.7 percent of feeder cattle sales during these two months; the loss of this supply could mean a few more dollars in cow-calf producers’ pockets.

Strong demand. Stepping away from the BSE incident, it remains clear that the base demand for beef remains strong, Roe said.

May beef production was 2 percent above beef production in May 2002. Prices in May of 2002 average $65 while prices this May averaged $78.

You don’t need to be an economist to figure out that a 2 percent increase in supply coupled with a 20 percent increase in live cattle prices means stronger demand, he said.

Surge drive. Much of this surge is driven by the demand for choice beef, with the choice-select spread hitting the $18 mark during May – about $10 over its seasonal average.

This is due to cattle marketing dynamics, Roe said.

The weights of slaughter steers are well below year ago levels and many feedlots were anxious to market cattle before the larger supplies of summer come along. This race to the slaughterhouse further exacerbates the difficulty of locating cattle that can grade choice.

The need for cattle that can grade choice was evident in recent movements in the feeder cattle markets, he said.

In Kentucky, eight hundredweight feeders were selling at a premium to seven hundredweight feeders, which is a rare event and signals just how eager feedlots are to get cattle to market that can grade choice before the inevitable seasonal decline in the choice-select spread and before the large feedlot placements from March and April crowd late summer slaughter houses, Roe said.

Cattle on Feed. The biggest news from the latest Cattle on Feed report was that feedlots placed 427,000 more cattle (+27 percent) on feed during April 2003 than in April 2002; no analysts had predicted such a surge and it is among the largest year-over-year increases in placements in some time.

However, April 2003 feeder cattle sales were 25 percent above April 2002 feeder cattle sales and foretold of the massive movement of cattle into this last stage of production, Roe said.

May 2003 feeder cattle sales figures are about 15 percent higher than May 2002, suggesting that the flow of cattle into U.S. feedlots will again run above year ago levels, though official figures will not be available until the June Cattle on Feed report.

Summer production. Needless to say, however, late summer beef production will increase both as the number of cattle coming to slaughter increases and as weights rise seasonally, Roe said.

Barring BSE related news, prices should drop from the upper $70s to the mid-$70s by the end of June and then gradually fall to the upper $60s by September, Roe predicted.

If the Canadian ban persists beyond June, Roe said he would add $1.50 to these prices. Prices will then begin their seasonal climb in October and move toward the mid-$70s by December.

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