For next weekend’s Superbowl game you are probably stocking up on chips and dip, you’ve planned for pizza delivery, someone is bringing a kettle of chili, and there will be plenty of your favorite beverages to wash down all of those spicy chicken wings. How many Superbowl gatherings will feature steak, hamburger, beef tips, or barbecued brisket? What’s wrong with this picture? The kickoff is at dinner time. Isn’t beef “What’s for dinner?” To our best knowledge there are no federal, state or local laws against preparing or consuming beef on Superbowl Sunday. There’s a lot of beef in front of the TV cameras, how about beef in front of the TV? Someone needs to work on this issue. In the meantime, we’ll work on the issue of why there is weakness in the cattle and beef market. You have to wonder if they are related!

On Friday the beef industry will be watching for USDA’s cattle report which will indicate how much expansion, if any, is occurring in the current cattle cycle. The past week’s USDA Livestock Outlook hints that increased numbers are not widely expected. “The Cattle report to be released on February 2 may point to a national cow herd expansion that has slowed, as the January 1, 2007 beef cow inventory may not show a significant increase over January 1, 2006 inventories. The Cattle report, along with the January 2007 Cattle on Feed report, could give some indication of the extent to which heifer retention for cow inventory expansion has been affected by poor forage conditions. Any significant cow herd expansion will likely come from the 2007 calf crop, implying that actual cow herd expansion could be at a reduced rate until 2009, which could provide support for beef prices for the foreseeable future.”

Beef prices could use some support. With weakening market values, increased feed costs, and a shortage of forage, cowboys are riding into swift currents of red ink. At Kansas State, livestock economist Rodney Jones says fall profits have quickly faded, “The average October steer closeout returned around $65.00 per head, following profits of around $100.00 per head on September closeouts. The impact of higher feed prices, and higher priced summer purchased feeder cattle, really began to be felt on November closeouts, with returns averaging a negative $46.00 per head. Preliminary calculations suggest that returns worsened for cattle finished in December. Average breakevens were $95.50 per cwt., which combined with average selling prices of just under $86.50 likely resulted in returns around negative $113.00 per head.” And Jones says based on feed conversion and daily gains, January losses could be $123 per head and February losses could be up to $158 per head.

In addition to high feed costs and the drought’s interruption of the normal pasture to feedlot transition, the incessant snow storms across the high plains turned feed conversion from positive to negative, says Jones, “Unfortunately, we have some reason to believe that performance will be below average for early 2007 closeouts. Historical data indicates that overall feed conversions for cattle finished in the first few months following major storm events can be impacted by as much as 15 to 20%. A 15% increase (worsening) of feed conversions with today’s feed prices results in $4 to $5 per cwt increases in the breakevens, translating to around $50.00 per head decline in profit prospects per head holding all other assumptions constant.”

With production costs increased by weather-related events and the corn market, the revenue end of the equation is not much better says Glenn Grimes and Ron Plain at the University of Missouri, “The number of cattle on feed January 1 was up 0.6% from a year earlier based on trade estimates. If true, this will be the fourth consecutive month for the number on feed number to decline relative to a month earlier. On September 1, the number of cattle on feed was up nearly 10% from a year earlier. The placements of cattle on feed during December are expected to show a decline of over 11% from 2005 and fed marketings during December are expected to show a decline of 4.4% from a year earlier.” That may be the best news if it is confirmed. While the market will already have that contraction built in, and discount it after the numbers are released, it will show the trend in the current cattle cycle as not expanding uncontrollably.

While cattlemen may be figuring out ways to stop the bleeding, don’t look to the processing industry for any help in solving the problem. Meat packer profits had been cut to the bone for the past couple years, and have trended up only recently say Grimes and Plain, “Retail beef prices in December were 1.1% below November and 3.8% below December of 2005. For the year of 2006, retail beef prices were 3.8% below 12 months earlier. Based on the data, retail beef prices would have been lower than they were if the total marketing margin had not declined by 3.5% in 2006 from a year earlier. The wholesale to retail marketing margin in 2006 was down 7.7% from 12 months earlier, but the packer's margin was up 18.3% from a year earlier. The packer's margin needed to increase for the last two years and has not been kind to beef packers.”

If the supply begins to tighten up, demand will still have to pick up to justify higher prices. But the fundamentals in the beef market have not been friendly recently. “Pork and poultry seem to be competing for consumer red-meat dollars for beef at the retail level. Overall demand for beef is not seen as particularly strong over the past few months. Exports have not improved much either. According to USDA the U.S. is still having problems resuming beef trade with South Korea as they turn more U.S. beef shipments away saying they contain bone chips or other prohibited animal parts. USDA hopes to schedule more talks before mid-February regarding the dispute.” That is the assessment of Mike Roberts of Virginia Tech, who agrees with Grimes and Plain that packers retreated from higher prices. “Packers are expected to keep slaughter rates down while bidding cash cattle lower hoping to keep margins in the black. The average beef plant margin for Monday was estimated at $16.45/head, up $1.20 /head from last Friday but down $2.65/head from a week ago”

If you have marketing chores, here are some ideas:
1) Mike Roberts says: “Cash sellers are encouraged to push marketings if they can get them out of the pens at the right weights. It is still wise to consider protecting a portion of 3rd quarter '07 marketings at this time. Corn users should hold off pricing more near-term corn inputs now. Corn users may want to protect against rising prices over the next few weeks.”
2) Jim Hilker at Michigan State r at Michigan State says for August Live Cattle: “There is a 10% chance that the price will be higher than $99.79 and a 10% chance that the price will be less than or equal to $75.95. This indicates that there is an 80% probability that the price will fall between these two prices. There is a 50% chance the price will be less than or equal to (or greater than) $87.01.”
3) Allen May at South Dakota State says for fed cattle: “The latest WASDE report left projections unchanged for the first three quarters of 2007 for fed cattle. The January report also gave initial projections for the fourth quarter. Live cattle futures are above the projection range for all of 2007, suggesting pricing strategies are favorable to protection strategies at this time.”
4) Allen May says for buying feeder calves: “There is currently substantial upside for the first and second quarters of 2007, suggesting hedgers use protection versus pricing strategies for those periods. A synthetic put strategy, selling futures and buying an out-of-the-money call, may be a way to manage short-term risk in this volatile market. For the third and fourth quarters the futures prices are in the middle of the projection range.”

Summary:
With higher corn prices and weaker market prices, the beef producer is finding new holes in his belt to use in tightening it up. However, increases in cow slaughter indicate the expansion in the industry may be slowing, which is good news for producers whose profits have disappeared. Increased packer margins have consumed some of the profit, along with a weaker seasonal demand and the closed Korean market. Keys to turning around the predicament will be reduced supplies and increased demand.