CME: Acceleration in Beef Shipments

A couple of months ago, just when the summer beef market was heating up, we noted the curious resemblance between 2008 and 2006 beef prices (year/year % change). Similar to this year, in 2006 prices declined sharply in the spring, pressuring futures lower and providing retailers with the opportunity to book a lot of steak features for the grilling season. Going back and updating our chart from early June, the pattern in beef price action this summer has continued to track very closely with what took place back in 2006. And it makes plenty of sense...so far. After all, the retail ads that helped push wholesale beef prices higher are running their course and the thrill of grilling has been replaced by a satiated nod.

Restaurant business, on the other hand, continues to struggle, removing a necessary support for beef prices going into the fall. Yes, ground beef prices are high and trimmings are expensive but packers need to be able to put more money on the valuable cuts in order to justify the lofty +$100 cattle prices indicated for this fall. Will the 2006 pattern in beef cutout values (which were lower year over year in November and December) repeat this year? Not necessarily and both bulls and bears can make an argument for that. At the moment, cattle futures continue to place a significant premium on Q4 cattle prices, just like they did back in 2006. As the chart to the right shows, however, those 2006 premiums quickly eroded as cattle prices declined from around $90 in late August to $85 by the end of the year.

A number of things are different this year from that in 2006. On August 1, 2006, there were 7% more cattle on feed than the previous year. Remember that we still had $2.50 corn at the time. Those cattle came to market towards the end of the year, pressuring prices lower. This year, we started August with 4% fewer cattle on feed than a year ago. In addition, the improvement in beef export markets should help support demand in Q4. Current US beef exports to Korea have shown a significant improvement while beef shipments to Japan also have accelerated. Those holding a more bearish view of the market would likely point out that the decline in fed supplies and improvement in exports is more than offset by the weakness in domestic demand. Lower disposable incomes and the negative wealth effect from a declining housing and equity markets also are factors that the beef market did not have to contend with in 2006.

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