Beef Spending Takes Fourth Quarter Break

By Mike Miller, Cattle-Fax

Beef spending at the wholesale level has made a very normal seasonal decline in 2004.  Wholesale spending (net beef supply x average beef cutout) will decline from the third quarter to the fourth by between 5 and 6 percent.  A normal decline would be about 4 percent and last year was the only time in the past 15 years when this measurement actually increased from the third quarter to the fourth.

This doesn’t necessarily mean that beef demand declines significantly during the fourth quarter each year.  What it does represent is that net beef supplies typically decline by at least 5 percent from the third to fourth quarter.  In fact, the decline in spending is due entirely to the drop in supply.  Both beef and cattle prices normally respond to the smaller supply by increasing slightly in price.  This year however, it looks as though both beef and fed-cattle prices will end the fourth quarter with averages very close to the third quarter, suggesting that beef demand may be slightly softer than it was earlier in the year.

Beef demand is expected to remain strong during 2005.  Both retail and wholesale prices are expected to average close to 2004 levels although wholesale prices will likely average slightly lower.  The light-Choice cutout is anticipated to average $138 while the light-Select cutout is expected to average near $130.  The light-Choice cutout averaged $141 during 2004 while the light-Select averaged $133.  Average retail prices are expected to average near 2004 levels during 2005.

Bottom line:  Overall beef spending levels have increased significantly during the past 18 months at both the wholesale and retail level.  The fact that the market has operated at these elevated levels for over a year suggests that these new levels are here to stay.  Expect wholesale spending levels during the first quarter of 2005 to approach record highs.  If this occurs, the average cutout should be well supported in the mid-$130's ($145 this week) and should trade from $135 to $145.  This should also support a fed-cattle price range from $82 to $88.