Livestock Angles: Beef supply may exceed demand

August 01, 2008 11:13 am

— The cattle market appears to have reached some sort of top during the middle part of July.
The cash market fell throughout the week of July 14 as the futures market tumbled in conjunction with the weakening cash. The tumble in prices looks as if it may have started from the fact that the beef cutout values reached a level where the retailers pulled back on their orders. The volume in the boxed beef trade has declined steadily during the rise in the cutouts, reflecting the weakening demand for beef.
From a supply observation the slaughter has remained high since the first of the year, so beef production has been more than adequate to meet current demand. Therefore, the fact that the current supply of beef may exceed the current demand could bring further weakness to the live cattle trade in the weeks ahead.
With the break that has occurred in the futures market recently, a recovery rally may be seen in the next few weeks to correct an oversold condition. Without the demand increasing significantly in the next few weeks an extended rally appears to be unlikely. With the inflation problem now facing all consumers, choices of where the food dollar is spent will determine the fate of the beef market.
Considering that speculation has been one of the dominant factors driving cattle prices higher, one would think the deferred cattle contracts would still be vulnerable to further price depreciation.
Producers should approach the cattle market with caution and use rallies to hedge inventories.
The hog market, on the other hand, has seen cash prices on the rebound for the past several weeks. Demand for pork appears to be the driving force behind the current rally. This demand has come from both the domestic market as well as the export sector.
The weakening dollar, along with the cheaper wholesale cost of pork, has attracted the recent demand for product. Pork cutouts have responded by increasing, thus allowing the packer a good profit margin and therefore the strong cash prices for live inventory.
From a competitive standpoint, pork has the most value in comparison to beef and should continue to have a strong retail and export demand in the near future. This should bode well for prices in the near term with prices remaining steady to maybe a shade higher.
Producers should consider the fact that the deferred futures are carrying large premiums and could provide good hedging possibilities since they were driven higher by speculation of a declining hog herd.

Copyright © 1999-2008 cnhi, inc.