Beginning in May-June, the industry sees the start of the market's bottom form. That price-bottom formation is helped by seasonal factors such as cattle hitting their prime growing season grazing on green pastures. Weather is a big market factor that drives the cattle market lower in the late spring/early summer time frame. How severe vs. how normal the weather is can help bounce the cattle market off its seasonal lows.
In the June-to-August time frame, U.S. beef demand could be curbed by higher gas prices, according to Kevin Penner, AgTrader Talk, LLC, cattle analyst.
Normally, the summer months offer a spike, as U.S. consumers grill steaks and other beef cuts. This helps trim supply, and it ignites a turn higher for cattle prices.
Market watchers still consider, as a major market factor, the devastating drought that Texas cattle producers endured last year, resulting in tight U.S. supplies. But weak economics is being equated to slower beef demand in 2012.
“If I had to point to one thing putting the brakes on cattle running back to $130 per hundredweight, it would be the higher gasoline prices,” Penner says. “If people are spending $4 to $4.50 per gallon on gasoline and it costs $120 to fill up their Ford Explorer this summer, they won't be buying steaks.”
Still, weather could play a big role on the direction of this summer's cattle market, Penner says. As the Texas agricultural industries recover from $7.62 billion of drought-stricken losses in 2011, all eyes will be focused on whether the southern Plains gets hit with a repeat inclement weather occurrence. As of this writing, close to 70% of Texas, the largest cattle-producing state, remained in severe drought or worse, according to federal statistics.
“If the cattle down there have to endure another summer like they did last year, that would become the major market driver. But the gasoline prices still weigh heavily on price potential.”
Price calls
After hitting $128.92 per hundredweight on February 22 of this year, June cattle futures prices could test the $116- to $117-per-hundredweight level in the summer months, Penner says.
“I see the market bouncing back to $123, depending upon weather and gasoline prices,” he says.
On the low end (an ideal weather summer combined with cheaper gasoline prices and an improved economy), the June futures cattle contract could have a hard time rebounding to $120 per hundredweight, Penner says.
Because the futures and cash cattle markets have been maintaining convergence, the local auction cattle prices are expected to be closely tied in June, July, and August. A disconnect in the two markets could occur in the event that the industry can't get a handle on the pink slime controversy.
