Drought continues to influence slaughter mix…

Cow slaughter continues at a heavy rate relative to the base cow inventory, with cows and bulls making up as much as 30 percent or more of daily estimated cattle slaughter. This slaughter is based on both a seasonal component in which cow slaughter increases in fall/winter and a reflection of the tight stocks of hay and other feeds needed to carry cattle through the winter. The heaviest slaughter is concentrated in the Southern United States.

Rains over the last few weeks have improved surface soil moisture in many places and provided a reprieve from the drought in parts of the southern United States. Although more precipitation will be needed to break the drought or to sustain the emerged wheat crop through the winter, there has been enough rain to provide support for prices for lightweight feeder calves, which recently reached the $2 per pound level. However, La Nina is forecast to persist into 2012.

…and Distort Feeding Patterns
Placements of feeder cattle in feedlots of 1,000 head or more continue to be drought-driven, and, as a result, have been heavily weighted toward under-600-pound calves. While improving for some larger, older cattle with fewer days on feed, feeding margins for many cattle remain negative due to increased costs of longer feeding periods for cattle placed at lighter weights. Furthermore, Central and Northern Plains feedlots continue to receive fed cattle price premiums over Southern Plains feedlots because of their relatively larger supplies of heavier, higher-grading cattle ready for market. These premiums on fed cattle have reached more than $1 per cwt in recent weeks (http://www.ers.usda.gov/Publications/LDP/2011/04Apr/LDPM2021/).

Wholesale Choice beef cutout values have climbed into higher territory, exacerbating the widening spread between Choice and Select beef, which is due as well to a decline in the price of Select beef that followed a brief increase in cutout values during August. After peaking at a weekly average of $187.25 per cwt during the last week of August 2011, Choice cutout values declined to $180.25 during the second week in September before reaching $189.92 during the second week of November. At the same time, Select beef declined from a peak of $181.75 during the third week of August 2011 before declining to a low of $168.70, but then reached $171.43 during the second week of November.

This strength in Choice beef has been attributed to both smaller numbers of Choicegrade cattle and continued large cow and bull slaughter and to Wal-Mart's decision to sell Choice beef in their stores. The proportionally large cow/bull slaughter is providing ample supplies of processing/lean beef, which is blended with 50-percent lean trim and, thus, has increased the demand for 50-percent lean trim from Choice cattle. The tightness in Choice beef supplies is due in part to the motivation to reduce feeding periods because of high costs of feed and feeder cattle, which results in fewer cattle grading Choice. In the face of tight Choice beef supplies, increased demand for Choice product from the retail sector has manifest itself in higher Choice beef prices relative to Select.

Reduced numbers of Choice fed cattle going to market have also resulted in reduced supplies of 50-percent lean trim. Combined with the continued high rate of cow and bull slaughter, these prices for 50-percent trim, from which ground meat products are produced, have also risen. Currently, prices for 50-percent lean trim are at record levels, having reached $1.26 per pound on November 9, 2011. Packer margins are reported to be continuing negative and may lead to reductions in cattle slaughter in order to pressure prices for live cattle lower.

Choice retail beef prices set another record in September at $4.91 per pound, while the retail price for all-fresh beef declined 4 cents per pound from the high of $4.48 set in August. After a potential dip this winter, retail beef prices are expected to increase year-over-year into 2012.