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Northwest Iowa Dairy Outlooks

A local discussion of current science and issues concerning dairying in northwest iowa

This week Standard & Poor’s Ratings Services placed its long-term sovereign ratings on 15 members of the European  Economic and Monetary Union (EMU or eurozone) on CreditWatch with negative implications. 
We have also maintained the CreditWatch negative status of our long-term  rating on Cyprus and placed its short-term ratings on CreditWatch with negative implications. The ratings on Greece have not been placed on  CreditWatch. The ratings on the eurozone sovereigns are listed below.
Today’s CreditWatch placements are prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole.
We believe that these systemic stresses stem from five interrelated factors:

  1. Tightening credit conditions across the eurozone;
  2. Markedly higher risk premiums on a growing number of eurozone sovereigns, including some that are currently rated ‘AAA’;
  3. Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater
  4. economic, financial, and fiscal convergence among eurozone members;(4) High levels of government and household indebtedness across a large area of the eurozone; and
  5. The rising risk of economic recession in the eurozone as a whole in 2012. Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40% probability of a fall in output for the eurozone as a whole.

Live cattle futures declined sharply on Monday, with the December and February contracts closing down the daily permissible limit. The sharp sell-off was attributed to fears of a credit downgrade for a number of key Euro Zone countries although it is hard to see how a credit downgrade for Europe have much of an impact on US cattle futures expiring in a couple of weeks. Outside markets remain a concern and affect the day to day activity in markets.

Last week, the choice beef cutout was hovering around $195/cwt. while live steer prices (USDA 5-mkt, all grade avg.) were quoted around $124-125/cwt. It was not a great situation for packers and they were bidding around $121 for cattle and feedlots were countering with $126-128 offers. The packers blinked first and last Thursday cattle traded at $126 while Friday prices were quoted at $128.13. But even as packers had to pay up for cattle, beef prices continued to drop and last night the choice beef cutout closed at $190.2/cwt, $5/cwt or 2.5% lower than a week ago. Markets remain concerned that beef prices have pulled back regardless of the upcoming year end holidays and expectations of some demand improvement for holiday parties and year end office parties. Should the cutout drop another $5-10 per cwt through the end of the year, it would imply live steer prices below the $120/cwt.

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