The trend was mixed among the various segments of the cattle market last week. Fed cattle prices were generally $1.00 lower at $123.00 in the south. Live sales were steady to $1.00 lower at $123.00 with a few to $124.00 while dressed sales were $2.00 lower at $198.00 in the north. Moderate trade developed Friday afternoon. Choice beef cutout values traded back and forth, ending $1.00 lower on moderate movement. Weekly slaughter was 592,000 compared to 627,000 last year.

Live cattle futures traded sharply lower early last Monday on lower cash sales from the previous Friday afternoon and weakness in outside markets. Futures recovered to close moderately lower. These losses were recouped Tuesday as outside markets rallied. Moderate advances were also posted Wednesday on further strength in outside markets and forecasts for a winter storm. All months from June on back set new contract highs Wednesday. A firmer US dollar and slower beef export activity resulted in a modest decline Thursday. Profit taking and technical selling caused sharp losses Friday as futures ended the week $0.10-1.07 lower for the first four contract months and $0.60-1.10 higher on most others.

Feeder cattle sold steady to $2.00 higher last week with calves selling $1-5.00 higher. Movement was moderate while demand remains active. Feeder cattle futures followed the trading pattern of distant live cattle futures. After very small losses Monday, futures rallied sharply Tuesday and moderately Wednesday. Small losses Thursday were followed by large losses Friday on technical selling and large live cattle declines. Futures prices ended the week $0.20-0.80 higher, except March which lost $0.15. All months set new contract highs Wednesday.

After two weeks of higher fed cattle prices, the market has seen two weeks of lower prices. A second week of margin related slaughter reduction (592,000) was the smallest non-holiday week since March 2009. Steer carcass weights were unchanged on the latest revised data following two weeks of contra-seasonal increases. Slaughter reductions should allow packers to force through some near term price advances in beef cutout values but retail margins and movement are still a concern. The short term seasonal pattern for live cattle futures appeared to develop about ten days later than usual (see last week's commentary) but would completing its correction any time.

A key factor in evaluating market risk for fed cattle is when yearling cattle are placed on feed with a breakeven above the current fed cattle market. When this occurs in the first five months of the year (as it has this year) the cattle have less than a 20% probability of being profitable (assuming no risk management). This data should be respected (especially in light of record high purchase prices and breakevens) and serious consideration should be given to some form of risk management for summer fed cattle marketings.

The tight supply of feeder cattle available outside feedlots was confirmed in the recent cattle inventory report. This supply reduction and the premiums in deferred months of live cattle futures have kept feeder cattle demand very strong resulting in record high prices. The estimated increase in beef replacement heifer numbers in the cattle inventory report could further tighten feeder cattle supplies. While the seasonal pattern would suggest a strong trend into spring, it's impossible to know how much of the supply reduction is already priced into the market. Last year a March correction in feeder cattle prices was followed by a very large break from early April to late May. As previously discussed, very large profit opportunities would suggest a prudent risk management strategy would protect some of that profit.