The big hubbub in the cattle market right now is with demand. In times of uncertainty, people eat less high priced beef. There are less vacations and business trips where high-end steaks are purchased. At the grocery counter the food buyer may switch to a lower priced beef cut or either switch to poultry or pork. Data from 2007 showed even with the big jump in energy prices and sub-prime problem, demand actually increased. Data for the month of January showed no significant change. Choice beef prices were up 4.1% and fresh beef prices (includes choice and select) were up 5.0%. Today the government released February retail prices for beef. There was some weakening to note, but not a panic situation at all. Choice in February was up 3.4% and fresh was up 4.7%. February CPI (inflation) was 4.0% and Food and Beverage was 4.5%. Taking inflation off those retail prices shows deflated retail prices about even or just under last year's level. Given the level of beef supply we would estimate demand is running around 1% lower than last year right now. That is not great, but is no-where as bad as the market is trading. We favor monitoring demand at the consumer level. However, the wholesale level can be important to monitor as well. On that side the choice/select spread can be important to watch. Six weeks ago it was completely normal with an $8 premium to choice. On Monday, it closed just over even. In other words, the wholesale market is seeing a drop in orders for high-end beef and an increase in lower priced select demand. We had noted since the first of the year we had not seen a drop in demand. Now we are seeing it!
There is no problem with supplies yet. Slaughter levels have averaged around 1% higher for the past six weeks. Those totals will start to grow in mid to late April, in both actual numbers and in percentage of last year terms, as the extra winter placements first start to show up. Those extra slaughters will hit hard in May, June, and July. You may have also been hearing about weights. Carcass weights are 15 lbs higher for steers and 20 lbs higher for heifers. That sounds bearish, but keep in mind that is compared with last year's winter damaged cattle. Last year weights were sharply below 2006 levels from February into June. We are actually running below 2006 weight levels. Overall we are not concerned about near term beef supplies.
For Live Cattle, we could carry our demand discussion from last week over into this week. As noted in this Monday morning's comments, we expected a lower trade based on the Bear Sterns financial problems announced over the weekend. Last week we noted how retail data shows consumer level demand was not a big problem in February, but wholesale information (the wholesale beef choice/select spread) is a concern. Normally there is a $9 premium in the choice but last week it finished only around $1 higher. Some are also arguing investment money, which has poured into live cattle futures via index funds, was leaving the market. If true, it would make some sense. Since January 1 index funds went from net long 119,908 contracts to 142,514 as of last Tuesday the 11th. In the bigger picture it is easier for us to focus on demand. Beef production is only running 3% higher than a year ago, while fed cattle last week was $8 lower than year ago levels. That leaves demand as the possible culprit for around $5 of that lower price. All of this still confirms our net bearish feelings on the June and August. We were already bearish based on the supply increase from winter placements that will be coming in a few weeks. Now with demand we are wondering if our June futures target should slip to $82 to $85. Keep in mind June 2007 futures expired at $85.50 and cash cattle traded down to $86 that week for the year's low. Now the actual tough question here is with the far deferred contracts. They are carrying a massive premium as supplies on a percentage basis will fall to below year ago levels. They should carry, and will carry, that premium. Any speculative longs in the October and December would have a risk filled now. Would the safe trades now be to simply sell call premium on the June contract? There is a $1 premium on the June $95 calls.
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