The first half of 2006 was anything but business-as-usual from a fed-cattle marketer’s perspective. The fed market struggled as low as the upper $70s on a live basis in late April and early May, and then rallied back to the lower to mid $80s into mid to late June. A number of factors were involved in this contra-seasonal pattern, and some of them will continue to affect the fed market through the second half of the year.

The chief factor in this deviation from the typical fed-cattle pattern of making March/April highs and then declining into the summer was extremely dry conditions in major wheat-grazing areas in Kansas, Oklahoma and Texas, which forced early movement of cattle into feedyards on the southern Plains during the late fourth quarter of 2005 and first couple of months of this year.

Major disruption in placement pattern

There were actually many calves shipped to the southern Plains for turnout on wheat in late October and November that never saw winter pasture at all because of poor stands. Thousands of others were placed into backgrounding yards throughout the area in the hope that significant rainfall would revive the wheat crop, but the vast majority of these cattle were either sold directly to feedyards or stepped up to finishing rations as dry conditions persisted and the cattle reached flesh conditions that were no longer suitable for turnout.

By early spring, the normal production cycle for hundreds of thousands of cattle had been significantly altered because of the drought, nationwide on-feed inventories hovered roughly 10 percent above 2005 levels, and the fed-cattle market was set up for quite a struggle with the drought placements in the South ready to reach market weights at roughly the same time as the leading end of the seasonal run of calf-feds on the northern Plains.

The result was a record-making collapse in both cash cattle prices and April futures. Fed-cattle prices declined from first-quarter highs of $95 to $97 to many sales being done around $77 to $78 in late April and early May (a time frame when it is not uncommon for the fed trade to establish yearly highs). By mid-May, many market watchers pondered whether the fed trade would be able to hold above $70 after Memorial Day, as the bulk of northern calf-feds made their way on to showlists in Nebraska, Iowa and the remainder of the Corn Belt.

June brought unexpected recovery

However, just when most in the industry had prepared themselves for a “long, hot summer” and a sea of red ink, stronger-than-expected domestic beef demand after Memorial Day resulted in Choice boxed beef values holding in the upper $140s to low $150s throughout June. This unexpected strength in wholesale beef produced slaughter margins that packers had not seen in years, and gave them the incentive to process cattle at an aggressive pace. By early July, the industry had strung together numerous weeks of 700,000-plus slaughter, and the majority of the supply of northern calf-feds had been cleared from feedyards in Nebraska and Iowa.

At the same time, live-cattle futures posted a dizzying rally, with the August through December contracts challenging contract highs during the last week of June as traders shifted to a mind-set of looking forward to tighter fed-cattle supplies in the second half of this year. May placements in the U.S. were down 14 percent, with Kansas and Texas down roughly 20 percent from a year earlier. This drop-off came as no surprise given that the typical southern Plains placement pool in late spring is comprised primarily of “graze-out” wheat yearlings – which were in very short supply this year due to drought and earlier forced placements.

Fall should see a good market

The big drop-off in spring placements sets the fed-cattle trade up for what could be a very interesting late third and fourth quarter of 2006, as fed-cattle numbers and beef production from roughly Labor Day forward are likely to be well below year-ago levels (unless an expansion of drought conditions were to force widespread liquidation of cow numbers). While the driving factors behind the two events are completely different, the most recent parallel that can be drawn to this type of reduction in feedyard placements was when the confirmation of the first BSE case in North America created a very uncertain and volatile environment for a few weeks in late May and early June of 2003. Most will remember the market explosion that took place in September-October 2003 when the industry traded fed animals above $100 on a live basis for the only time in history.

Is that a prediction? No, just an observation of the magnitude of market moves that can occur when the normal nationwide placement pattern is altered to such a significant extent. Nonetheless, it does appear that fed-cattle prices are likely to show some contra-seasonal strength in the third quarter of this year, as fed supplies are likely to be relatively snug both north and south.

To stay abreast of market-moving activity as it happens, call Jeff Stolle in the NC Lincoln office at (402) 475-2333 and join the NC’s Market Reporting Service.

Jeff Stolle is NC’s vice president of marketing