Grain markets continue to vacillate between the potential for another big crop, creeping drought conditions and a potential deterioration in crop conditions.

Corn futures took out all the risk premium that was built in late May and early June and now participants are bracing for a WASDE report that could show 2016/17 corn stocks well over 2.2 billion bushels.

Expansion has been the name of the game in the meat complex. Plentiful grain supplies and a lower overall cost structure (disinflation in energy, land rents, and fertilisers) all but assure that expansion will continue in the next 12 months.

At this point the argument is about how much meat supplies will increase.

Beef markets appear to be in much more solid footing than futures are giving them credit for. The beef cutout has held together quite well despite several weeks of large slaughter.

What has been particularly impressive, in our view, is the fact that fat trim values (50CL beef) has stayed in the high 80s and low 90s even as slaughter has hit multi year highs. But while the surge in the price of 50s appears odd, and to some unsustainable, it is important to recognise that the ratio of 50CL beef to fed cattle prices is actually quite near long run averages for this time of year.

Among factors supporting 50CL beef values to this point:

• increase in the quantity of ground beef demanded as retailers promote it more aggressively given the big discounts compared to 2014 and 2015;
• strong export pace, which means more fatty cuts such as short plates are going to export and not the grinder;
• the seasonal decline in steer prices, which means less fat trim as percent of the carcass;
• and finally traders and end users that were caught short and now have to chase the market as prices have not declined as they normally do in late June and July.

The strong performance of the 50CL beef has been one of the factors supporting the value of the beef cutout but it is not the only one. Steak cuts continue to outperform and add value.

There is broad expectation that prices for middle meats will drift lower in July and August and this seems fair when considering the slowdown in beef demand during the hot summer months and expectations for cattle slaughter to remain well above year ago levels.

The question, however, is one of degree. Lower loin, rib and fat trim prices could remove another $10 from the value of the choice cutout in the next four weeks. And yet, a choice beef cutout in the mid 190s normally correlates with $120 cattle.

It appears that packers will continue to hold on to their lofty margins, especially with the capacity reductions that were put in place the last few years. But big margins also should continue to pull cattle forward.

The last couple of weeks have been quite disappointing for hog producers, especially given the flights of fancy that were way too common as the grilling season was getting underway.

A lot of hopes were pinned on the export story and the possibility for a runaway pork market this summer. So far exports have been good, as expected, but just not enough to pull the cutout in the mid 90s (weak loins, ribs trim).

One thing that is always difficult to assess is the effect that competing meats have on demand and we think lower beef prices have had an impact.

For retailers looking to maintain their sales dollars up, promoting steaks and ground beef certainly made more sense than running pork chop sales this summer. Belly prices have yet to climb the ladder although the fair bet is that they will.

At this point there is a recognition in the pork complex that supplies are ample and while exports will help clean up the extra supplies, that may not be enough, especially come October when pork production hits +500 million lb/wk.