Increasingly tight cattle supplies suggest margins at all levels above the cow-calf sector will be squeezed in coming months, said Derrell Peel, Oklahoma State University Livestock Marketing Specialist, in a letter to Extension agents called Cow-Calf Corner.
CATTLE INDUSTRY STRUCTURE
The cattle and beef industry consists of primary production at the cow/calf level followed by a series of margin sectors for stocker and feedlot production, slaughter and fabrication at the packer, including beef product markets, he said.
Price adjustments in each of those sectors are related but variable in magnitude and timing, Peel said. Generally, retail prices adjust less and more slowly than at the farm level.
Retail beef prices were mostly unchanged over the last 16 months, with the most recent monthly retail all fresh beef price down 0.7% from last year, he said.
THE SQUEEZE INCREASES
However, current choice boxed beef prices are up more than 14% from a year ago, Peel said. It appears retail margins are decreasing as wholesale values increase faster than retail.
Retail beef prices reflect only grocery sales. Less is known about beef price adjustments in food service and export markets, he said. The ability of retail beef prices to move higher as limited supplies and rising wholesale prices squeeze margins is perhaps the biggest concern in beef markets currently.
Beef packer margins are being squeezed with more pressure expected.
“Fed cattle prices are up 25% year over year, outpacing the 14% increase in boxed beef prices,” Peel said. “Additionally, packers will face increased overhead costs as declining cattle numbers will reduce packing plant utilization rates in the coming months.”
Feedlots currently enjoy good profits from the long-time lags in feedlot production and the fact that fed prices increased quickly to record levels this year, Peel said. Increases in fed cattle prices are balanced against the price of feeder cattle placed in feedlots roughly six months ago.
However, it’s just a matter of time before feedlot margins feel the squeeze, he said. Current feeder cattle prices are up about 39% from last year. Feedlot breakevens will increase sharply by the end of the year.
Calf prices are up roughly 50% from last year, Peel said. With calf prices increasing faster than feeder cattle prices, stocker margins are eroding.
However, similar to feedlots, the time lags in stocker production will allow the uptrend in feeder prices to offset part of the high calf purchase prices, Peel said. A significant uptrend in feeder prices is priced into deferred futures contracts, and, depending on the details, stocker or backgrounding programs may still show decent prospects for positive returns.
But calf prices likely will continue increasing faster than feeder cattle in the coming months.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $173.84 per cwt to $174.06, compared with last week’s range of $169.74 to $183.99 per cwt. FOB dressed steers, and heifers went for $271.01 per cwt to $274.39, compared with $268.57 to $278.21.
The USDA choice cutout Tuesday was up $1.03 per cwt at $304.96 while select was up $2.85 at $287.77. The choice/select spread narrowed to $17.19 from $19.01 with 94 loads of fabricated product and 21 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were down $0.05 to $0.07 at $1.68 to $1.78 a bushel over the Jul corn contract, which settled at $5.93 1/2 a bushel, down $0.00 1/2.
The CME Feeder Cattle Index for the seven days ended Monday was $207.61 per cwt, down $0.01. This compares with Tuesday’s Aug contract settlement of $237.77 per cwt, up $3.85.