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Live cattle prices hit 13-month low. What next?

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Prices of fattened cattle hit a 13-month low, underlining their discount to futures in feeder cattle - and provoking expectations that the gap between the two contracts will close.

But how?

Futures in live cattle, animals ready for slaughter, fell 1.0% to 145.35 cents a pound in Chicago for August delivery – the lowest for a spot contract since June last year.

The decline was attributed to softened ideas on demand for US beef, with exports hurt by the strong dollar.

"US beef exports were lower in May, and it appears that June and July exports will not fare much better," Paragon Economics and Steiner Consulting said.

Record beef prices

Meanwhile, on the domestic market, demand is seen as having been undermined by stronger prices earlier in the summer, which have encouraged consumers to switch to other meats.

Retail beef prices in the US last month, at $6.114 per pound, set a record high.

"Many people are switching to pork or chicken," said Don Roose, president of Iowa-based broker US Commodities.

Wholesale beef prices, while up $0.27 per hundredweight on the day to $234.10 per hundredweight, are down 12% from a high two months ago, and amongst their lowest levels since June last year.

'Substantial discount'

However, futures in feeder cattle, ie animals ready for fattening, while falling on Tuesday at one point by 1.8% to 212.45 cents a pound for August delivery, remain well above recent lows.

The spot Chicago feeder cattle contract hit 193.00 cents a pound in February.

Compared with feeder cattle, live cattle futures on a discount of some 68 cents a pound are "at the low end of the range going back two to three years", said Mike Zuzolo at Global Commodity Analytics.

"Fat cattle are at a substantial discount."

At the start of the year, the gap was less than 54 cents a pound.

Demand to improve?

Does the extent of the discount signal that live cattle are too cheap, or feeder cattle too expensive?

In fact, there are widespread expectations that fattened cattle futures are somewhere near a bottom, with history suggesting a July nadir in values.

Mr Roose said: "One of the reasons you tend to get this seasonal bottom around early August or the end of July is because of the government buying beef," ahead of the return of US schools from around the middle of next month.

Mr Zuzolo flagged the potential for broader demand picking up too, given improving US economic signals, suggesting more prosperous consumers.

"The strong majority of this data suggest we are going have stronger demand for beef, which will push up the market for live cattle," he told Agrimoney.com.

'Multi-year bear market'

However, market bulls may not have it all their way for long, with feeder cattle potentially poised for a decline which could last for years.

While feeder cattle values have been supported by the need to rebuild the US herd from multi-year lows - encouraged by both better pasture conditions and, until lately, buoyant beef prices – the incentive to boost numbers will ultimately wane.

"Other countries such as Brazil and Argentina are also expanding their herds because of high prices," Mr Roose said.

"Ultimately, that will all come home to roost.

"Feeder cattle are going to go into a multi-year bear market," although that "might be six months to one year out".

By Mike Verdin

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