Sorting out the January cattle and beef market run -

This leaves a very narrow choice-select spread of $1.98 per cwt. This level is close to the seasonal low in the choice-select spread but it usually does not occur until March or April.

Several factors are at work in the current wholesale beef market. Clearly supply reductions are a major driving factor. Year to date beef production is down 10 percent from 2013 January levels, with cattle slaughter down 10.6 percent year over year so far this year.

This follows a nearly 10 percent drop in beef production the last week of December 2013, due in part to a fire that idled one major packing plant for much of Christmas week. Another factor is that this market rally has been driven almost entirely by chuck and round products rather than middle meats (rib and loin).

Additionally, the cutter cow cutout is up $10 per cwt from year ago levels; all of which indicates that this rally is driven by mostly by ground beef and processing beef demand. The more than 11 percent drop in cow slaughter in the fourth quarter of 2013 probably played a significant role in setting up the supply reductions that helped drive the January rally.

The unusually small choice-select spread at this time is due to a combination of increased demand for select and decreased supply of select relative to choice. The percent of cattle grading choice continues to run well above year ago levels, as it has since Zilmax was removed from the market last fall.

The fed cattle market has likely peaked as well, although a market top was less clear at the end of last week. Fed cattle traded at $147-$150 per cwt, live basis, through the end of the week. Additional cold weather this week is likely impacting animal performance and slowing feedlot marketings.

Tight supplies of feedlot-ready cattle will help support fed prices but a likely pullback in boxed beef values will increase pressure to push fed prices back down some. The latest Cattle on Feed report showed that January feedlot inventories were down 5 percent from year earlier levels. Longer term perspective is shown with the January on-feed inventory decreasing from the previous month, confirming that the December 2013 was, as is typical, the seasonal peak in feedlot inventories.

However, the December 2013 seasonal peak was the smallest December peak since 1996. The fractional year over year increase in December placements does not change the fact that feedlot supplies will be very tight in the months to come.

After such a dramatic run, a pullback in both wholesale beef and fed cattle prices is more expected than not. The major question and big unknown is just how much prices might drop back. While a series of very short run factors have contributed to this unexpectedly large and rapid increase, the underlying longer term fundamentals are in place to support strong prices.

Part of the current market run has been due to short-bought retailers and post-holiday refilling of pipeline supplies and it is not clear how much is due to demand strength looking forward. Assessing demand will be an ongoing process in the coming weeks.

Meantime, supplies will likely stay relatively tight. Winter weather could play an especially important role in the ability to rebuild short run supplies. The market picture may clarify significantly in the next two to three weeks.