A USDA feedlot cattle report showed 10.45 million cattle were being fattened for slaughter on July 1, a four-year high for that date and up 3.8 per cent from a year ago.

“The bigger supply now means a smaller supply later. It means fewer cattle in 2012,” Don Roose, analyst with U.S. Commodities Inc. said after viewing the July 22 reports.

Feedlots are filled with cattle because a drought in the southwest has killed pasture, leaving ranchers few options other than to fatten the animals for slaughter.

USDA reported 1.695 million head of cattle were placed in feedlots in June – up 4.2 per cent from a year ago and the largest June placements since 2006.

More cattle in feedlots means fewer to be put in breeding herds. As a result the cattle herd will keep shrinking, resulting in fewer cattle and less beef next year and in years to come.

In a separate report, USDA confirmed that trend. It said the U.S. cattle inventory, which includes all cattle inside and outside of feedlots plus calves and dairy cattle, was 100 million head, down one per cent from 2010 and the smallest July 1 herd since mid-year records began in 1973.

For traders of cattle futures, the inventory numbers were bearish in the short term, but still showed the herd was shrinking.

“We will see a sharp decline in beef supplies for the next three years,” said Rich Nelson, analyst at Allendale Inc.

Frequent droughts in the southwest, high feed costs, a decrease in domestic beef consumption, and cultivation of pasture land for crops have all contributed to this decline.

The smaller herd is at a time when global demand for U.S. beef is strong. Japan, Russia, South Korea and a number of other countries are buying U.S. beef because of better economies and smaller supplies among rival beef producers, analysts said.

U.S. beef export sales are up 35 per cent year-to-date at near 532,000 tonnes.

In addition, the recent finding of radiation-tainted beef in Japan has raised hopes of even more U.S. beef sales there.

While long-term forecasts suggest fewer cattle and higher prices, analysts saw near-term pressure as the USDA numbers came in on the high side of expectations.

“The report was a surprise. The trade has not been off this far on placements for years,” said Nelson.

Countering bearish reactions to the cattle reports, was bullish drawdown last month in beef and pork stocks in Friday’s USDA storage report.

Beef supplies swelled in May as a cold, wet spring doused outdoor grilling. Better weather in June appeared to have recovered some of that business, said Dan Norcini, an independent livestock trader.

———

“Wewillseeasharpdeclineinbeefsuppliesforthenextthreeyears.”

Rich Nelson

Allendale Inc.

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A USDA feedlot cattle report showed 10.45 million cattle were being fattened for slaughter on July 1, a four-year high for that date and up 3.8 per cent from a year ago.

“The bigger supply now means a smaller supply later. It means fewer cattle in 2012,” Don Roose, analyst with U.S. Commodities Inc said after viewing Friday’s reports.

Feedlots are filled with cattle because a drought in the southwest has killed pasture, leaving ranchers few options other than to fatten the animals for slaughter.

USDA reported 1.695 million head cattle were placed in feedlots in June — up 4.2 per cent from a year ago and the largest June placements since 2006.

More cattle in feedlots means fewer to be put in breeding herds. As a result the cattle herd will keep shrinking, resulting in fewer cattle and less beef next year and in years to come.

In a separate report, USDA confirmed that trend. It said the U.S. cattle inventory, which includes all cattle inside and outside of feedlots plus calves and dairy cattle, was 100 million head, down 1 per cent from 2010 and the smallest July 1 herd since mid-year records began in 1973.

For traders of cattle futures, the inventory numbers were bearish in the short term, but still showed the herd was shrinking.

“We will see a sharp decline in beef supplies for the next three years,” said Rich Nelson, analyst at Allendale Inc.

Frequent droughts in the southwest, high feed costs, a decrease in domestic beef consumption, and cultivation of pasture land for crops have all contributed to this decline.

The smaller herd is at a time when global demand for U.S. beef is strong. Japan, Russia, South Korea and a number of other countries are buying U.S. beef because of better economies and smaller supplies among rival beef producers, analysts said.

U.S. beef export sales are up 35 per cent year-to-date at near 532,000 tonnes.

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The Chicago Mercantile Exchange shut down the frozen pork belly futures market at the end of business on Friday, July 15.

The closing had been expected. Trading in pork belly futures had dropped to zero in recent years after the meat industry became integrated and used fresh pork bellies instead of frozen ones to make bacon.

The contract started trading in 1961 and was the oldest existing CME livestock futures contract.

Pork bellies, as the name indicates, are cuts of pork that come from the underside of the hog and are made into bacon. Demand for pork bellies and bacon increases in the summer when tomatoes ripen and people make bacon-lettuce-tomato sandwiches.

Because pork production peaks in the autumn, the frozen pork belly contract was created as a way to give pork companies a means to cover the cost of storing, or freezing, pork bellies until the following summer when they were thawed and processed into bacon, said long-time Chicago trader Bob Short,

“The name sounded attractive. Nobody knew it was bacon. It made people laugh,” Short said.   “We primarily traded the pork belly market until about five to seven years ago when there was then no one to trade with, so we quit,” he said.

Pork bellies had their heyday in the late 1960s and 1970s, when they were the CME’s most popular agriculture contract

“The glamour market was the pork bellies. There was a mystique about it, maybe it was the name,” said Harvey Paffenroth, who has been at the CME since 1968.

He worked summers for his uncle Vincent Kosuga starting in 1968 and in 1971 became a CME member.

“That was probably biggest traded commodity at the floor of the CME. They had potatoes, eggs, cattle and hogs. Cattle was a pretty good-sized contract but it wasn’t as big as the pork bellies,” said Paffenroth.

Stand-up comedians of the 1960s, ’70s and ’80s were quick to latch on to the pork belly contract whenever they joked about financial markets.

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“At this point consumers are relatively happy because they are coming out of the other side of the recession. They are a little bit more liberal in their spending and they are not being quite as cautious,” Merrill Shugoll, president of Shugoll Research, told Reuters.

Shugoll and Michael Uetz, principal at Midan Marketing, talked about their research on the sidelines of the International Meat, Poultry, and Seafood Convention in Chicago.

While consumer spending has not changed despite higher meat prices, Uetz said there could be a slowdown in meat sales in future surveys.

Retail beef and pork prices have been at or near record highs in U.S. Agriculture Department surveys and will likely go higher in the months ahead as current high wholesale prices pass through the market.

Uetz’s survey included supermarket meat sales in 2010. Since then retail meat prices have increased, which could trim sales volumes.

“The challenge for us is to try to maintain that (volume) number with the increase in prices,” he said.

Meat prices have increased due in large part to significant increases in beef and pork exports.

The surveys, which were funded by the two research firms, showed greater use of coupons but an absence of bargain hunting.

Consumers are still buying the cuts of beef, pork and chicken that they normally do and have not yet shifted to lower-cost meats or other foods.

“People are looking for good value, they are looking for the products that they want, and coupons are allowing them to do that,” said Shugoll.

Shugoll’s results were from a March 2011 online survey of 500 consumers across the country of varying demographics.

“In the January 2009 study we saw an increase in purchasing of lower-value cuts. We are seeing people going to the low value less frequently because things weren’t as bad as they were in January 2009,” she said of the latest results.

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But this surge could be a precursor of a decline in supply that could soon mean higher beef prices at stores and restaurants, analysts said after a U.S. government report.

The U.S. Agriculture Department on Mar. 18 said there were nearly 11.4 million cattle in feedlots on March 1, or 105 per cent of a year ago and the largest for that date since 2008.

The five per cent increase was due to profitable cattle prices, which had feedlots filling cattle pens. But replacement cattle numbers needed to keep those pens full are rapidly shrinking, meaning there will be fewer slaughter cattle later.

“We are going to see that feedlot supply drop to 100 per cent (of a year ago) and then below 100 per cent later this year,” said Ron Plain, University of Missouri agricultural economist.

When that supply shrinks, beef production will go down, and beef prices will go up.

“The beef supply is really going to tighten up in the second half of 2011 and that should put some pretty pricey beef in the meat case,” said Plain.

Retail beef prices already are record high, with USDA reporting the average February price at a record $4.62 a lb.

Smaller supply anticipated

Fewer cattle and higher prices have been anticipated. Cattle supplies are declining because the U.S. herd is the smallest in more than 50 years as the recession, high feed prices, and lately record-high prices for young cattle discouraged ranchers from retaining breeding stock.

The report signalled there will be smaller supplies ahead. It showed the number of cattle added to feedlots in February, called placements, down about one per cent from a year ago. After the report, analysts said those placements will get even smaller. “The key point is that placements dipped under last year and they will stay under last year’s levels for at least the next six months,” said Rich Nelson, analyst at Allendale Inc. “That’s long-term bullish for the October, certainly the December and all of the 2012 contracts,” he said of the Chicago cattle futures.

The report also showed feedlots sold nearly 1.8 million cattle to slaughterhouses last month, up 4.5 per cent from the year earlier pace and slightly more than expected.

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U.S. hog producers are not expanding herds as worries about high feed costs have them managing what they have, analysts said Friday after a government report showed only a slight increase in hogs.

The U.S. Agriculture Department showed the hog herd as of March 1 at 63.964 million head, up 0.7 per cent from a year ago. But that increase was largely due to better herd management as more young pigs are surviving to maturity.

USDA on Friday put the breeding herd at 5.78 million head, up 0.5 per cent from a year ago, and the market hog supply at nearly 58.185 million, up 0.7 from a year ago. 

While all of those numbers were slightly higher than average trade estimates, analysts were reluctant to predict an end to the recent surge in hog prices because of this year’s strong demand for hogs and pork. USDA forecasts U.S. pork exports to be up more than 10 per cent this year.

Nearby hog futures are nearing record highs at the Chicago Mercantile Exchange and deferred contracts are even higher. 

“It is slightly negative, if anyone cares,” Jim Clarkson, analyst with A+A Trading, said of the report.

Robust pork exports to Mexico, South Korea, Japan and others have had analysts and traders focused on demand rather than supply.

“I think cash fundamentals will rule the day and the expected increase in exports to Japan will outweigh any impact,” Dan Norcini, an independent hog trader, said.

High feed corn prices have discouraged expansion. Corn costs about $6.80 a bushel now and there are worries it could surpass $7 or even $8 should the 2011 corn crop be hurt by production problems (all figures US$).

“Hog producers are waiting for some signal that feed is going to be cheaper before adding any sows,” said Ron Plain, agricultural economist at the University of Missouri.

Plain noted the report forecast a slight decline in pig litters this year versus 2010, which could mean fewer hogs and higher hog prices in 2012.

Chicago hog futures closed at a one month high on Friday at 92.475 cents per lb and are near the record high for a lead contract of 95 cents set in February.

“Numbers were just a little bit heavier than expected as far as upfront supplies. But we would not think this would impact Monday’s trade at all,” said Rich Nelson, analyst at Allendale Inc.

— Additional reporting for Reuters by Michael Hirtzer.

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U.S. cattle and hog futures closed sharply higher Friday and for the week with the April cattle the highest ever for a lead contract on widespread fund buying and short covering.

Both markets have fully recovered the losses incurred shortly after Japan’s March 11 earthquake. In the days after that disaster, cattle futures lost about six per cent of their value and hog futures more than five per cent.

Fund buying pushed the markets to the day’s highs, but it was cash market events that started futures higher.

In cattle, higher cash sales this week in Nebraska, the No. 2 cattle state behind Texas, at $190 per hundredweight (cwt) on a carcass basis triggered buying in futures (all figures US$). As the futures rose short covering and chart-based buy orders were activated.

“If you were short, would you be happy right now?” said one cattle trader explaining the rush by some traders to buy back short positions.

Since the Japanese earthquake, wholesale beef prices rose to their highest since 2003, cash cattle traded higher from Texas to Nebraska, and Japan was back in the market buying U.S. beef.

Also, Japan may need to buy more beef to replace meat that was either spoiled due to power outages or contaminated by the radiation leaks, said Dan Norcini, an independent livestock trader.

The U.S. Department of Agriculture on Thursday reported Japan bought 3,900 tonnes on U.S. beef last week, the largest sale to any country that week.

While beef demand is strong, the supply may decline, which could force cattle prices even higher, traders said. The U.S. cattle herd is the smallest in more than 50 years and feedlot cattle numbers are expected to decrease in the months ahead.

April cattle futures closed up 2.775 cents, or 2.4 per cent, at 118.600 cents per pound and actively traded June was up 2.975 cents, or 2.59 per cent, at 117.750 cents.

April peaked Friday at 118.650 cents per pound, the highest ever for a lead contract.

Feeder cattle moved higher with live cattle with March up 1.100 cents, or 0.84 per cent, at 131.900 cents per pound and April up 2.225 cents, up 1.68 per cent, at 134.850.

Hog futures advanced, with June contract the highest in a month, helped by this week’s higher pork prices and by talk of pork plants needing hogs to maintain production schedules.

Also, a USDA report on Friday showing a $7.37/cwt increase in the average Iowa/Minnesota cash hog price helped push futures higher. Cash and futures traders speculated that jump in cash may reflect a price increase over a few days.

USDA’s Hogs and Pigs Report, released after the close, appeared to have little effect on Friday’s futures trading. The report showed about one per cent more hogs on U.S. farms as of March 1 than a year ago and a breeding herd about unchanged from a year ago.

April hogs closed up 2.150 cents, or 2.27 per cent, at 92.475 cents per pound and June up 2.525 cents, or 2.5 per cent, at 103.700.

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U.S. hog futures fell Friday, closing at their lowest in four days on worries that sales could slow to Japan, the top export market for U.S. pork, after a massive earthquake damaged ports and roadways.

“We have to assume lower demand from Japan from consumer fear and confusion. Additionally, we have to assume a portion of their port capacity is damaged as well,” said Rich Nelson, analyst with Allendale Inc.

Traders watched TV screens on the Chicago Mercantile Exchange (CME) trading floor that showed earthquake damage in Japan, and swift-moving floods that washed away cars and debris.

“The concern is if the ports are down they can’t get meat into the country,” said James Burns, a Chicago hog trader.

In 2010, Japan was the top export market for U.S. pork, taking 1.285 billion pounds, or $1.65 billion worth, and the No. 3 market for beef at 351 million lbs., about $639 million worth (all figures US$).

Transportation has been disrupted with commuter lines down and road traffic slowed to a crawl, according to U.S. Meat Export Federation (USMEF) staff in Japan.

“USMEF staff reports that road traffic is moving slower than a walking pace, which is making it difficult for retail and food service outlets to receive shipments of perishable products,” said Jim Herlihy, a federation spokesman.

At the CME, April hogs were pressured by funds buying June and selling April to move longs to June. Such spreading, which was active all week, should slow next week, traders said.

The U.S. Meat Export Federation said it is too soon to know if pending meat shipments have been affected or delayed.

April hog futures closed down 1.700 cents, or 1.89 per cent, at 88.150 cents per pound, their lowest close since Monday. The June was down 1.950, or 1.92 percent, at 99.500 cents.

Beef prices

Cattle futures finished mostly lower as they also were pressured by the earthquake.

Higher beef prices on Friday briefly turned futures higher near midday. The U.S. Department of Agriculture reported the average wholesale choice beef price, or cutout, was $180.93 per hundredweight (cwt), up $2.12 from Thursday and the highest since 2003.

Meat companies have raised beef prices to offset the record prices they paid for cattle. Cash cattle traded at $5 higher this week at $118/cwt, as fewer cattle forced high bids from packers.

June/April spreading by funds supported the June.

April cattle futures closed down 0.525 cents at 117.125 cents per pound and June was unchanged at 116.950 cents. Earlier, April dropped to 115.975 cents and June to 115.100.

Feeder cattle finished mostly higher, helped by double-digit declines in corn futures.

The March feeder cattle closed down 0.250 cent at 131.550 cents while April was up 0.325 cents at 134.525.

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(Reuters) — Lady Gaga’s favourite Judas Priest burger will still cost $12 at Kuma’s Corner as the  trendy Chicago eatery resists raising prices, even though the cost of making that burger has gone up.

“You can’t pass it on, not in times like this,” Kuma’s manager Frank DeBoss said of the higher beef prices, which recently rose 10 per cent.

The Chicago eatery, a favourite of the New York-born singer, is facing the same pressures as other restaurants around the country as they are paying more for beef due to smaller supplies here and overseas.

While grocery stores and restaurants have been trying to absorb much of the increased costs during the shaky economy, analysts predict consumers will soon pay more as supplies shrink and beef plants pass on the higher prices they are paying for cattle.

“Retailers have absorbed margins and restaurants too,” said Jim Robb, economist at the Livestock Marketing Information Center. “The dilemma is will the U.S. economy grow fast enough to allow them to pass on the higher costs? That is the unanswered question.”

Beef prices are being pushed higher because production is dropping in the United States and around the world. Also, as the economy gains traction consumers here and overseas are eating more of it.

Shrinking herd

The U.S. cattle herd is the smallest in 50 years and is expected to get even smaller as near record high prices for steers and heifers have ranchers selling off their breeding stock rather than rebuilding herds.

Cattle traded this week at $108 per 100 pounds, the highest in seven years, and some analysts predict record highs of $120 or more later this year.

While the cattle herd and beef production shrink, demand is on the rise.

Foreign countries are buying more U.S. beef because of improving economies there and because of production problems in their traditional suppliers, such as flood-ravaged Australia.

U.S. beef exports in 2010 through November are up 25 per cent from a year earlier.

“The largest beef supplier is the United States right now,” said Eric Ocrant, vice-president of Chicago-based Oak Investment Group.

China, a country with 1.3 billion people, is expected to start buying U.S. beef after a seven-year absence due in part to flooding in Australia reducing beef exports.

Buying habits

As beef prices go up, consumers will change their buying habits favouring smaller portions or lower-cost alternatives, such as more hamburgers and fewer steaks, said Alton Kalo, analyst the consultancy Steiner Consulting.

“From high-end steak houses to casual chains, everybody has a burger on the menu because they find that is a better deal for consumers,” said Kalo.

“There will be incremental increases in beef prices as we go forward.”

In 2008, when food and fuel prices spiked higher, consumers switched to hamburgers from steaks. Kalo said that could happen again.

As Kuma’s Corner has discovered, even hamburgers will be expensive. Much of the meat used for U.S. hamburgers is imported, primarily from Australia, and that supply is down, which has increased costs of the raw materials nearly 20 per cent in 2010.

“Because Australia is not shipping product to the U.S. that has caused a significant inflation in those materials,” he said.

— Bob Burgdorfer writes for Reuters from Chicago.

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Smithfield is recovering from two years of losses that resulted from high feed prices, a glut of hogs and a recession that slowed meat sales.

The company responded by trimming down. It now produces about two million fewer hogs a year, it sold off a beef unit, closed an inefficient pork plant, and just recently sold its share in the Butterball turkey operation.

“I am more optimistic than I have been in a very long time,” chief executive Larry Pope said during a conference call with investors. Smithfield officials said they do not anticipate herd expansion in the United States or overseas.

On Dec. 9, Smithfield reported a record quarterly profit that topped expectations due to higher hog and pork prices.

“The (pork) margins they achieved this quarter were stunning,” said D.A. Davidson analyst Tim Ramey. “I would not forecast a continuance of that, but I am forecasting good margins.”

While the results were impressive, they may be hard to repeat, particularly in pork processing. Corn prices are above $5 per bushel, which is still historically high. Smithfield officials said those prices should remain high, but stronger hog prices have helped offset that cost.

In the quarter that ended Oct. 31, Smithfield’s hogs, on average, sold for $56 per hundred pounds, up from $36 a year earlier.

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