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Cattle Markets Wrestle With Economic Uncertainties

Macro-economic conditions holding back otherwise strong fundamentals for cattle prices.

Cattle markets have displayed a noticeable lack of direction lately, considering the generally strong fundamentals.

"Much of the weak undertone is due to external factors and seems more the result of uncertainty about possible negative outcomes or uncertainty about the impact of negative outcomes than to the direct impact of decidedly negative situations," says Derrell Peel, Oklahoma State University extension livestock marketing specialist.

Not all the factors are external, though, Peel says. The beef industry has had plenty of negative news in the past month with concerns over lean finely textured beef (LFTB) and the fourth case of Bovine Spongiform Encephalopathy (BSE).

The worst of the direct impacts of LFTB is past but lingering effects will likely impact markets for several more weeks. The beef trimmings market, where prices briefly dropped by half, has recovered much of the lost value.

On the other hand, the BSE case had almost no impact on cash markets with the negative impacts confined largely to rumor-based futures trading ahead of the official USDA announcement of the case. Most of the drop in live and feeder futures was recovered within a few days. Though U.S. beef exports have been largely unaffected, the attitude it created has hampered markets the past two weeks.

Peel also says the U.S. and global macroeconomic situation is problematic for cattle and beef markets. Little overtly negative news has emerged on the U.S. macro economy but lackluster performance such as the recent jobs data builds uncertainty about the prospects for the economy.

On top of that, the persistent threat of widespread fallout from the financial collapse in several European countries is now increased by election results in France and Greece. Concern about economic problems in Europe leads to jitters in the U.S. stock market , financial industries and futures markets.

In addition, significantly higher prices have increased capital requirements for beef industry producers. Together with rising and volatile input prices it makes producers hesitant to act aggressively, despite strong cattle market fundamentals.

Lenders are under close oversight by bank regulators and are also moving cautiously, either hesitant or limited in their ability to provide capital for livestock producers. The resulting equity requirements limit the ability of many producers, especially young producers, to participate in the current market. In the Southern Plains, this financial environment is contributing to a slow recovery from the drought-forced reductions in cattle numbers.

On another front, beef exports so far in 2012 have weakened from the sterling performance of the past two years. While a slowdown in exports was not a surprise, lower exports so far this year creates uncertainty about the strength of beef exports for the remainder of the year.

Peel says not all the news is bad, however. High gas prices, which surely impacted beef demand earlier this year, have begun to drop. Wal-Mart has announced a major beef promotion which could help jumpstart summer beef demand. Early planting of nearly 96 million acres of corn with good yield prospects may bring some feed price relief in the next crop year.

Peel says although cattle and beef markets have stalled recently, prices remain close to the record levels of the spring. The nature of all markets is it takes some time for markets to regroup before moving higher

Peel says, "Seasonal tendencies, though perhaps muted or altered in the current market, will still affect markets through the summer period. The market fundamentals of decreasing beef production and continued tightening of animal inventories provides plenty of fuel for higher prices but the many clouds of uncertainty limit how fast and when those fundamentals will prevail."

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