Why Has the Market Improved Since September?

The cash fed cattle market has had an impressive rally since the first full week of October when the cash fed cattle price averaged $64.03/ cwt.  By the first week of February, fed cattle prices averaged $81.09/cwt.  That’s a $17.06/cwt. rally in just 19 weeks.

During that same period, the light Choice boxed beef cutout rallied from $109.17 to $135.02 — up $25.85/cwt. For perspective, last year’s spring highs for fed cattle prices and the light Choice boxed beef cutout were $74.28/cwt. and $124.64/ cwt., respectively.

In determining why this price rally has occurred, one only has to look as far as the two economic components of price:  supply and demand.  Simply put, supplies tightened and demand improved. 

During the fall and early winter of 2002, fed cattle supplies began to decline substantially, but fed cattle slaughter and beef production remained above a year earlier.  Fed cattle supplies as measured by the Cattle-Fax monthly beginning inventory were 17 percent smaller than during the same period in 2001.  Carryover supplies were 42 percent smaller than a year earlier.

The decline in monthly fed cattle supplies was brought about by fourth quarter shipments that were only 6 percent smaller than a year ago that had to be sourced from smaller placed against supplies (down 20 percent) and the smaller carryover totals.  As the fourth quarter 2002 developed, supplies got tighter and this scenario continues to play out today.

Better beef demand helped packers move wholesale beef prices 3.8 percent higher during the fourth quarter.

January and February fed cattle supplies were 25 percent below a year earlier.  This and slightly lighter carcass weights have resulted in weekly average beef production during January and February that were 2 percent and 3 percent smaller, respectively.  The decline in weekly average beef production for January and February, compared to a year ago, will be about 15 million pounds per week, which is worth about $3.50/cwt. plus the increase of hide and offal values of more than $1/cwt.  Demand and additional margin shift between cattle feeders and packers for January and February totaled about $4.25/cwt. better for fed cattle prices.