Because of strong profits in July, cattle feeders have continued their aggressive bidding for feedlot replacements, driving prices to record highs. They also have fed cattle to larger weights as a way to avoid these record-high feeder cattle prices.
The end results of the market chasing itself are record-high breakeven prices. Breakevens have shot up because the cost of 700- to 800-pound feeder steers have shot up more than the cost of feed has declined.
As reported by the Livestock Marketing Information Center, those Southern Plains steer prices jumped nearly $30 per cwt to average near $229 for the nine-week period ended Aug. 1. A year ago, this same steer would have brought about $153.
In that same nine-week period, the USDA’s five-market average slaughter steer price increased almost $17 per cwt while corn prices decreased about $1 a bushel.
Fed cattle prices in the Plains last week traded at mostly $155 per cwt on a live basis, and the LMIC calculated current average breakeven prices to be about $147 per cwt, leaving a $13 profit window for feeders.
However, constant demand from cattle feeders for replacement calves could erase profit potential in coming months. The LMIC estimated breakeven prices for cattle placed in August to be about $148, increasing to around $164 for cattle placed in October and about $170 for cattle placed in November.
At the same time, fed-cattle prices are expected to remain in the upper $150 range through the third quarter, implying significant red ink for cattle feeders.
And not only are prices for beef breed feeder cattle going up, but prices for dairy breed feeders also are climbing. Holstein steer calves weighing about 700 pounds sold in late July at $169 per cwt, and 300-pound California steers for December delivery sold for as much as $301.
PACKER PROFITS ALSO IN QUESTION
Continued packer profits also may be tenuous, although the outlook appears to be better for them if they can avoid flooding the market with excess supply.
Sources say consumers are pulling back from high beef prices as rising wholesale prices hit the retail counter. Beef demand, it seems, remains strong, but the ability to pay for the same volume or more at rising prices may be hitting its zenith.
The USDA’s boxed-beef cutout value has pulled back from record highs set just two weeks ago. The choice beef cutout value was quoted Monday at $255.10 per cwt, down $0.44, and the select cutout was $246.57, down $1.81. Over the previous five trading days, the choice cutout fell $4.34, or 1.67%, from $259.44, while the select cutout dropped $5.05, or 2.01%, from $251.62.
If fed cattle prices rise in the fourth quarter as expected and consumers continue to restrain their beef purchases, packer margins, which currently are considered to be profitable at about $45 a head, may be in jeopardy.
So if packers lose their profitability and feedlots lose their profitability to pinched supplies and rising costs, they only segment of the industry making money could be the cow/calf producer and those with pasture to rent.
Packers currently are able to meter beef production to some extent through controlled slaughter rates. USDA data show slaughter last week was estimated at 577,000 head, compared with 573,000 a week earlier and 624,000 a year earlier. But with rising slaughter cattle weights, beef production was estimated at 465.5 million pounds, up from 460.7 million the previous week but down from 497.6 million in the same week a year earlier. Further production controls may be necessary.
IN OUR OPINION
–The USDA’s new traceback system for contaminated ground beef should hasten the removal of tainted ground beef from the supply line. At the first hint of E.coli O157H7, inspectors will descend on a plant for further testing rather than wait for confirmation, which can take two days.
–US alfalfa hay production is expected to be record large, up 11%, or more than 6 million tones, larger than last year to 63.6 million from 57.6 million in 2013.
–Corn condition slipped to 72% good to excellent from 73% a week ago. Such a slip is normal, and it’s way ahead of last year’s 61%. Corn reaching the dough stage was rated at 70%, well ahead of the 63% average.