Close to the Knife

A favorite phrase in talking about meat packers is "Close to the Knife." It means that when cattle prices don't suit them, and they run out of formula cattle they stole on forward contracts, they don't buy very many head from feedlots--just barely enough to keep the production lines moving.

When the phrase comes into the lexicon of the business, is when they come up short, because boxed beef and wholesale beef moves so well that they need to ramp up production to meet the demand. Normally, fed cattle sell out of the feedlots on Thursday afternoon or Friday, and packers get enough bought to carry them through the following week. Most of the Thursday or Friday purchases are for delivery a week from the next Monday.

When they are forced to take delivery earlier than that, or don't even have enough bought to pull them forward, they are said to be "Close to the Knife."

So it was last week, when packers jumped into the market on Tuesday--way earlier than normal. Memorial Day beef sales the week before were much better than they estimated, and they bought cattle based on the four-day work week of the holiday. When retailers placed heavier than expected orders following the excellent Memorial Day beef clearance, packer buyers had to jump into the market early.

They were helped by a blip in corn prices, driving cattle futures down preciptiously and convincing feeders to take $1 lower money for their cattle. If feeders had held out a day or two, short bought packers would probably have been forced to pay $1-$2 higher money to get the cattle they needed. (Hindsight is 20-20, as they say).

Now the floods in Iowa, burying some of the nation's best cornfields, are driving corn futures to all-time highs on the Chicago Board of Trade. If the rumor-caused bounce of a week ago drove corn prices, how on earth will they open Monday morning, when faced with a real, rather than contrived, disaster?

It ought to be interesting.