CME: Live Cattle Futures

Live cattle futures have been pressured lower in the past two weeks due to a combination of weaker cash prices, softer beef cutout values, lower corn futures prices out front and a general uncertainty about the state of the US economy going forward.

As the chart below shows, compared to two weeks ago futures have lost as much as 540 points on the nearby August contract while the February 2009 live cattle contract is down as much as 563 points.

The decline in cash values was not entirely unexpected, especially if you believe that much of the spike in some beef cuts was driven by short term summer grilling demand rather than a more sustained shift in demand. As we pointed out in an earlier report, we think that depressed cattle futures this spring allowed retailers to book heavily in what amounted to a discounted market considering overall feed costs.

As summer rolled around and reasonably priced features hit the market, product movement apparently was even better than expected. With a larger share of production already booked, market participants had to bid prices higher in order to get the additional load of product. Consequently, we had choice beef cutout values reach $173.8 cwt last week, $30 /cwt or 24% higher than a year ago. As wholesale beef prices were heating up, feed markets were on fire until early July.

December corn futures on July 2 closed at $7.80 per bushel and 2009 corn futures all pointed to $8 corn or higher. Oil prices were also on an uptrend, further boosting the outlook for much higher commodity prices. A number of these very incendiary factors appear to have cooled off a bit in the past two weeks. Corn prices dropped sharply after a number of reports pointed to an improvement in corn crop conditions and production prospects.

Wholesale beef prices also appear to have lost some of their luster as we enter the dog days of summer, with the choice cutout down $2.7/cwt or 1.5T% from a week ago. As to where the market goes from here will depend on your opinion as to what happens with some of the fundamental drivers in the current market. Will energy prices continue to ease? Will corn prices decline further ? (not based on Wednesday’s trading) Will the US economy rebound or are we in for a more prolonged and deeper recession? The market is currently trying to grapple with these issues and, at this particular point, the majority of answers seems to be weighing on the downside.

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