Beef Market Advisor

Wednesday, December 21, 2005

Purcell 20 Dec 05 Wednesday, December 21, 2005
7:13 AM

Bullets Added by Harlan Hughes

LIVE CATTLE (LC) in Chicago closed lower on Monday amid light trading. Market participation is
expected to taper off ahead of Christmas.

o Both the DEC'05 live cattle (LC) and the FEB'O6LC set new highs at 595.85/cwt and 597.25/cwt
respectively over talk of higher cash prices this week.
o The closing price for the DEC'OSLC was up S0.25/cwt at 595.775/cwt while the FEB'O6LC closed
down $0.275/cwt at $96.800/cwt.
o Cash cattle were active at S94/cwt to 595/cwt last week while $95/cwt to $96/cwt could be expecte
this week.
o Beef plants are enjoying profitable margins amid tight supplies of market-ready cattle.
O The strong cash market for live cattle supported December, while weaker deferred months were
attributed to Friday's USDA Cattle on Feed report showing more numbers coming to the packers next
spring.
o The monthly USDA report is expected to show double- digtt increases in November
placements versus a year ago. Those cattle would be slaughtered next spring.
O Efforts are being made to make sure U.S. beef gets back to Asia where many countries banned it ti
years ago due to a mad cow case in the U.S.
o Some of those bans have been lifted and more open doors are being pursued.
O USDA's choice beef cutout on Monday was high at $160.84/cwt.
O Live cattte feeders should consider short hed2es in the FEB'O6LC on 1st
quarter marketings and the APR'O6LC for 2nd quarter marketings.
o As last week, the market is still ignoring USDA's estimate of a 4% increase in beef production
in the 1st quarter and an 8% increased beef production in the 2nd quarter of 2006.


FEEDER CATTLE on the CME JAN'O6FC were up $0.25/cwt at $1 14.575/cwt while the
MAR'O6FC closed up 50.225 at$114.075/cwt.
O Feeder cattle closed mostly higher, with buying in the nearby months prompted by their discount to the
CIVIE feeder cattle index.
o The discount contracts to the CME cattle index provided some support in light trading.
o Most of the strength in the market came from retail buying ahead of the holidays with some support
from Japanese markets accepting U.S. beef
o Some January/March spreading was done by various firms.
o Feedlots responded to higher offers with quick movement. Prices may go even higher as showlists get
depleted.
0 Cash sellers should continue to keep marketin2s and wei2hts current white
hedt~ers should consider short hedt~es in the MAR' O6FC futures.

Pasted from Purcell Weekly Report 20 Dec 05. Click hot button to get complete report.

posted by Dr. Harlan Hughes 6:57 AM [edit]

Tuesday, December 20, 2005

Suggested Economic Impact Of Japanese Border Opening

Today's market expectations are one of substantially increased beef demand coming soon from Japan. I will argue that most of the potential run-up in market prices from the Japanese border opening is already in both the feeder and slaughter cattle markets.

Clearly, today's Futures market is reflecting this increased Japanese beef demand. Figure 103 (click to see) presents my current short-run Futures-based price projections covering 2006. These Futures-based planning prices show record high planning prices for 2006. This is in contrast to my long-run planning prices that peak in 2005 but these long-run prices do not take the current pent-up demand into consideration. North Dakota State University just released a research report documenting the potential market impact of Japan exports returning to 2003 level. This NDSU study suggested that with a full return to the 2003 export level to Japan ($1.4 billion), we could expect slaughter prices to go up $7.83/cwt, feeder cattle prices to go up $8.95/cwt and retail prices to go up $0.16 per lb. I believe that the current Futures market must have similar expectations. I took these numbers and calculated that the fall calf prices (500-600 lbs.) could go up around $12 per cwt. The problem, however, is that some analysts are suggesting it might take 5 years to get Japanese exports back to 2003 levels. The North Dakota report did not mention this time delay to get back to 2003 export level.

If I take these Futures market expectations and apply them to my long-run planning prices that were developed before the Japanese border opens, I get a set of planning prices for 2006, 2007, and 2008 presented in Figure 103. This is the highest boxed in areas of Figure 103. These Futures-based planning prices suggest a peak fall weaning price in 2006 with fall calf prices starting downward in 2007 and 2008.

But... There May Be A Problem With The Market's Expectations

I see some problems with the cattle industry's current expectations for the open Japanese market. We have lost a lot of the Japanese demand for U.S. beef over the last two years. Some Japanese consumers state they do not want U.S. beef again. It appears that one restaurant chain is the key demander of U.S. beef. Japan also has a law on the books where it places a duty tax on any beef import increases over 15% of the previous year. I have heard nothing about the Japanese Government repealing that law. Growing at a 15% rate will take a few years to get beef exports to Japan up to 2003's level. In fact, analysts are suggesting that it could take 4 to 5 years to get U.S. exports back to 2003's level again. The right-hand, lower box in Figure 103 reflects a five year delay (until year 2010) in getting the dollar impact of Japan exports benefits back up to the 2003 level as suggested by the NDSU researchers.

The Futures market may well have over anticipated the price impact of the Japanese border opening up again to U.S. beef. Here is a possible alternative scenerio. What if when the Japanese border opens and the demand for U.S. beef is substantially less than the market anticipated (like analysts are suggesting)? What if the validated 20 month age limit proves to be a stumbling block and/or Japanese demand for U.S. beef proves to be the stumbling block? In either case, this would generate a drop in beef cattle prices. If these conditions should develop, I expect that cattle prices would come down quite hard. If it should take 5 years to get beef demand back to the 2003 level, today's market price hype for feeder cattle could well remove considerable equity from today's beef industry. This all leads me to suggest the more cautious set of long-run planning price impact suggested in the lower, right-hadn box in Figure 103.

Figure 103 in total presents my Adjusted Long-Run Planning Prices with the Japanese border opening in early 2006. The gradual price impact from added U.S. exports to Japan are spread out over the 2006 through 2010 time period. Only in year 2010 does the price impact reach the NDSU study's suggest equivalent 2003 level. In the mean time, the cattle cycle is projected to have reduced cattle prices a long way below the 2005 price peak. Producers will have long forgotten about the price boom generated by the expectation of Japanese beef trade.

The key point here is that the opening of the Japanese border to U.S. beef could lead to my projected $12 increase in the cattle cycle low (year 2010) in calf price by the end of this decade. If this happens, the opening of the Japanese border in 2006 could go a long way towards helping ranchers survive the next cattle cycle's low price phase. And... all ranchers would benefit from that!

posted by Dr. Harlan Hughes 6:54 PM [edit]

Trends ... U.S. COW AND HEIFER SLAUGHTER BELOW A YEAR AGO

Federally Inspected (FI) cow and heifer slaughter levels have been well below a year ago in 2005. The smaller number of cows and heifers in the slaughter mix confirms that U.S. producers have fully entered the cowherd-rebuilding phase of the cattle cycle. The tighter supply of slaughter cows has supported rather strong slaughter cow prices this year.

From January through October, FI cow slaughter was down 6.5 percent from the respective period a year ago and nearly 17 percent lower than the prior five-year average (1999-2003). FI beef cow slaughter at 2.1 million head was down 7.4 percent, while dairy cow slaughter was 5 percent smaller than the respective ten-month period in 2004. Weekly slaughter data for November, suggests cow slaughter was seasonally larger with a year-to-year increase of 2 percent, but still well below the prior five-year average.

FI heifer slaughter in the U.S. totaled 8.2 million from January through October, down 528 thousand head (6 percent) from 2004's. Thus far this year, monthly heifer slaughter was at its lowest in February at 751 thousand head, which was the lowest monthly number since May 1993 (also 751 thousand head). November weekly slaughter data showed heifer slaughter up around one percent from 2004's, but 14 percent lower than the prior five-year average level. Of the total steer and heifer slaughter mix, heifers have accounted for 37 percent from January through November this year.

The annual January 1 U.S. cattle inventory numbers (to be released by USDA-NASS on January 27, 2006) will show an increased cowherd and estimates for tight feeder cattle supplies outside feedlots. In fact, nationwide feeder cattle supplies outside feedlots could be smaller than a year earlier as of January 1, 2006, if U.S. feedlot placements remain large in December.

Source: Livestock Monitor, WLMIC Dec 16, 2005

posted by Dr. Harlan Hughes 3:51 PM [edit]

Sunday, December 18, 2005

Market Comments

Live cattle futures contracts were somewhat lower on
Thursday (14 Dec 2005) but the overall tone in the market remains bullish.

Very strong prices for boxed beef continue to be supportive of the
beef complex. Cattle prices are also firm with reports of light trad-
ing at around $95 /cwtm. The USDA 5-market moving average
jumped to $93.68 per cwt on Thursday afternoon. Nevertheless, the
increase in cutout values has outpaced the higher prices paid for
cattle (how often have we been able to say this in 05). As a result,
the estimated packer margins for Thursday were reported to be a
positive +$37 /head, compared to a negative margins of around -$30
per head a year ago.

The choice beef cutout on Thursday (15 Dec 05) was the highest ever for the second
week of December and significantly higher than both a year ago and the
10 year average (see chart).

Source: CME Daily Electronic Newletter, 15 Dec 2005.

posted by Dr. Harlan Hughes 8:24 PM [edit]

Beef Trade Issues May Finally Take a Back Seat

by

Dr. Derrell Peel, OSU Extension Livestock Marketing Specialist, Dec 16, 2005

With the long-awaited opening of the Japanese market this week, beef trade issues will hopefully move out of center-stage for awhile. This not to say that the market effects are gone; indeed it will likely take years for recovery of the Japanese market. In fact, the market effects are fairly small immediately and will slowly grow as economic access is re-established, a process that will probably take longer than it has taken to reestablish political access.

However, it seems that psychologically, this week’s announcement was the final shoe to fall in the long list of aftershocks of BSE. The market breathes a sigh of relief even though there will be little market impact initially. There is, in fact, one more issue that will be addressed in 2006 and that is dealing with the over 30 month cattle and meat from Canada. However, it also will not likely be much of an immediate market issue by the time it happens and it doesn’t seem to have the industry holding their breath like the Asian market situation has.

U.S. beef exports to Japan are not likely to reach pre-BSE levels any time soon and there is good reason to think that they may never reach historical levels again. Beef exports to Japan peaked in 2000 prior to discovery of BSE in Japan and Japanese beef consumption has yet to recover from that discovery in 2001. The total beef market in Japan is simply smaller than before. U.S. exports to Japan were already smaller prior to BSE discovery here in the U.S. Now we must add to that several additional hurdles to rebuild exports to Japan.

First is the fact that there is a limited supply of age verifiable cattle available right now and it costs more to find and segregate these carcasses. Second is the fact that U.S. beef is cyclically expensive right now and likely to remain relatively expensive for another couple of years anyway. Third is the fact that two years have passed and menus, tastes and meat sources have changed in Japan. The U.S. must earn back market share from Australian beef, U.S. pork and other competing meats and countries. Finally, this week’s announcement also opens the door for Canadian beef into Japan and the Canadians have a several year head start on animal ID and now have more packing capacity than ever before. We have our work cut out for us and it will take time.

posted by Dr. Harlan Hughes 1:44 PM [edit]