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If an economic student looked at such a big drop in supply, a foregone conclusion would be for higher prices.
However, fundamentals have two sides to the equation, supply as well as demand. But if something is scarce, it doesn’t have to mean higher prices satisfy every demand outlook.
With the average daily USDA federal slaughter for steers and heifers down 3.6 percent from a year ago, the drop in prices can’t be blamed on too many cattle.
On the other hand, it is probably a good thing there are fewer numbers. It is likely prices could have dropped more because when meat prices are falling, one more steer can be one too many.
However, the number of head going to slaughter isn’t much of a factor at this time. More than likely beef has run into a couple of roadblocks.
Let’s face it, choice beef at $195 per cwt is high-priced beef and when select is around $176 per cwt and the consumer is choosing ground beef and hamburgers over choice steaks and standing rib roasts, something has to give.
For the week ending Nov. 2, choice boxed beef compared to the previous week was off $4.08 per cwt and select was down $4.16 per cwt.
Consumer demand
Did Hurricane Sandy cause a drop in meat sales? Probably not. Before the hurricane retailers reported grocery stores on the East Coast having very robust sales.
Consumers stocked up on fresh, frozen and canned products along with milk, bread and meats.
For over a week the storm was predicted and from Florida to Maine into the Canadian maritime provinces consumers stocked up.
After Sandy came to shore, as devastating and damaging as the storm was, fortunately the total area wasn’t as large as it may have been.
For the area devastated and people not shopping, thankfully, it ended up that more are able to shop. For now, it appears beef and grocery sales aren’t being affected.
I am concerned with the amount of beef in storage. Beef increased into storage from April through August, creating heavier stored stocks than any time from 2009 through 2011.
It is also at a time when cattle prices were increasing. With current large movement into storage, combined with previous stocks, packers will need to move beef to avoid costs of storing.
At the same time, with decreasing numbers of live cattle ahead in 2013, packers will not need to bid higher for live cattle.
The beef in storage could be considered a storage hedge. If beef or cattle start to move higher, packers can bring out beef from storage.
If cattle prices drop, meat may be dumped and when this has happened in the past, it ends up being a very negative situation.
Beef inventories
The actual cuts of beef in storage are also a major factor. It is too bad it isn’t all grindings or from cows and low-grading cattle.
At the end of September total beef in storage was about the same as last year. In 2012 total beef in storage compared to 2011 was 0.5 percent less.
There was a flip-flop of movement in and out. Trimmings were going out and quality cuts moved in.
Quality beef cuts increased into storage by 13 percent over last year at the same time cheaper cuts moved out of storage. Steak may be desired but hamburger is purchased.
I am also concerned about ham inventories in cold storage. Compared to a year ago, hams in storage are up 28 percent.
Of course ham sales normally pick up for the end-of-the-year holidays but to move such a large increase, it also means the consumer will pass over other large cuts of red meat.
With 13 percent more quality cuts of beef in storage, the consumer will pass over high-priced beef for cheaper hams.
It will mean keeping beef in storage to move lower-priced hams or offering beef at lower prices than it cost as it went into the cooler. With the costs to store, packers will not keep beef or pork in storage for long.
Seasonally, exports to Japan and Korea, along with many Asian countries, tend to slip now through the winter.
The current strength in the U.S. dollar is about the opposite of the past two years when the U.S. dollar was low compared to most currencies.
The usual down trend in seasonal beef exports with a cheap U.S. dollar could be like pouring gas on a fire.
I am also looking at present and future opportunities and opportunities cattle producers have already used to their advantage.
For almost two years, as previous hedges and contracts are delivered and then replaced and rolled when the cattle are sold and are replaced with feeders, future months as they move to expiration have fallen $3 to over $7.
With the current bear spreads, the market has priced in the possibility of higher markets. Feedlots have taken advantage bear spreading offers.
Currently, for two to three weeks, packers are using previously contracted cattle and the few bought on the open market are being taken in two to three weeks and sometimes longer. With average weights increasing week after week, under most conditions this is a negative situation.
Feedyard contracting
With the prospects of narrowing feeding margins, more feedlots are taking advantage of contracting. They recall last year when spring and early summer fed cattle broke down into the $110 to $112 price range.
With packer margins currently losing nearly $50 per head, with the need to move high-quality cuts from the cooler and with cattle contracted taken over privately priced cattle, unless there is a pick-up in exports or internal demand, which is highly unlikely, live cattle for the unhedged feedlot could see acceleration in losses.
Given the growing strength in the U.S. dollar compared to the Real and the Australian dollar, beef exports from the U.S. will compete for market share.
It is very likely bear spreading will continue. As fewer cattle show up in 2013, packers with high fixed costs will need to cut prices whenever variable costs allow.
Packers with cattle contracted above or near current prices will need to cut costs and one of the easiest ways to cut costs will be for the few cattle priced on the open market.
Unfortunately, the strong U.S. dollar and the lack of lower-quality beef in cold storage will push U.S. beef buyers away. Buyers worldwide will use more and more foreign products to meet consumer demand.
Fortunately, the bear spreading does allow for selling months in the future. With half the spread on with cattle that were purchased and are now long in the feedlot, placing the opposite leg of the spread simply means selling into the future when cattle will be delivered.
If feedlots don’t contract, they leave themselves open for the short leg of the spread to fall. Right now, markets are telling cattle producers to use the market and to sell the strength future months offer. It is one of the most basic explanations and definitions in marketing.
It is called bear spreading for a reason and until the bear spread reverses, especially under current conditions, for cattle producers it is to their advantage to use it. Fighting it is fighting the trend. 
