Second Quarter Holds Downside Price Risk for Beef
Source: Rabobank
Rabobank's global research report shows downside price risk short-term with recovery expected by mid-year.
Analysts with the Rabobank International Food & Agribusiness Research and Advisory (FAR) group are expecting to see a downside price risk for cattle and beef, due in large part to larger global supplies, led by Brazil in the second quarter of 2012. Rabobank’s Quarterly Beef Outlook assesses both the U.S. and global cattle and beef markets, giving long-term projections for both.
In the U.S., fed cattle prices traded at all-time record levels during the first quarter, with the average year-to-date price of $1.26/lb. and a peak price of $1.30/lb. in the first week of March.
Demand for U.S. beef took a hit following the media and public concern over lean fine-textured beef (LFTB). However, LFTB represents only about 2 percent of the U.S. beef market, and the damage done by the negative LFTB publicity should abate by mid-year. The ultimate impact on the market depends on how much and when any of the LFTB supply returns to the human food chain.
"Prices for U.S.-fed cattle should remain near $1.15 through mid-summer, before posting a sharp price recovery for the second half of the year," said David Nelson, Global Strategist with the Rabobank Food & Agribusiness Research and Advisory group. "Restricted supplies and seasonal considerations should drive the price recovery."
Cattle on feed numbers remain strong, with a 1 to 3 percent increase over 2011. During this time, federally inspected slaughter ran 6 percent below 2011 levels, and 5 percent below the five-year average.
"The live-steer-price-to-cutout-value ratio has been unsustainably high, confirming poor packer margins," said Nelson. "Packers have cut processing rates in an effort to support cutout values and exceptionally poor margins, driving the reduction in slaughter."
Steer carcass weights have been abnormally high, holding at 20 to 21 lbs. over the same period in 2011, and the five-year average. Despite the increase in steer carcass weights, U.S. beef production was down 3.4 percent from last year, as of mid-April.
Globally, once the larger supply of Brazilian cattle plays itself out in the second quarter, cattle prices should recover. Following that short-term supply bulge, Rabobank expects most beef-producing countries to go through liquidation, a retention cycle or weather-related problems.
Still, rising prices may be limited by weakness in economic growth in developing countries, shifting some demand to cheaper sources of protein. However, the longer term price outlook for cattle looks promising.
"Global meat protein, especially beef supplies, will continue to hamper profit and herd growth in important emerging markets," said Nelson. "This will support prices, while raising volume and cost risks to processors and price risks to buyers."
