As feeder and stocker cattle prices hit new highs almost daily, many buyers appear to be digging themselves deeper into a hole on returns, one from which many will never exit profitably. They also could be expecting fed cattle prices to rise enough to overtake calculated losses.
A case in point is a set of 390-pound calves for November delivery that sold on a video auction for $411.50 per cwt this week. With an initial cost per head of $1,604.85 and additional pasture and feed costs, veterinary expenses, expected death loss and transportation costs, they can be expected to exit a southwest Kansas feed yard with around a $250-per-head loss.
Such calculated losses are not always the case, however. A recent lot of 754-pound steers selling through the Oklahoma City auction at $226.00 per cwt for a cost of $1,704.04 a head could return a profit of $6.12 a head from that same southwestern Kansas feedlot.
That’s a thin calculated margin, and unexpected health issues or a jump in feed costs could turn it into a negative return in a hurry. And there are hints that some feeders are feeding the cattle they have to heavier weights rather than buy new feeder cattle, a temporary fix because the larger cattle produce more beef, which then hampers packer demand and lowers prices.
THE CME CONNECTION
The CME Feeder Cattle Index for the seven days ended Wednesday was another record high at $225.06 per cwt, up $0.11 from Tuesday. That’s ahead of the nearby Aug futures contract price of $220.67, which was down $2.35 on Thursday amid heavy long liquidation in live cattle and hog markets. Apparently, the market was spooked by the break in the stock market (which hinted at a weaker economy), further weakness in hogs and ideas the beef market just has to top out soon.
For candlestick watchers, trading action in Aug feeders over the last three days appears very bearish. Wednesday’s gap higher with a daily formation called a “hanging man” followed by a gap lower and a close near the open and the low of the day, signals further weakness.
On western charts, it might be seen as a one-day island reversal, and the limit-down closes in other feeder cattle contracts Thursday may provide further drag ahead of the weekend. Overnight trade, indeed, has continued lower.
BEEF MARKET REMAINS STRONG
The beef market, however, remains strong and may provide the support necessary to keep live cattle and feeder cattle prices moving higher. It may even provide some underpinnings to the pork market.
The USDA’s daily cutout value for choice beef Thursday was mixed, although it was up for the week. The choice cutout was up $0.74 per cwt to a record $263.66, but the select cutout fell $0.23 to $260.60. For the week, choice was up $8.10, or 3.17%, while select was up $7.76, or 3.07%.
Interestingly, the choice/select spread Thursday widened to $3.06. Seasonally, this is the week in which this spread begins to widen as the market prepares for the Labor Day holiday and then the year-ending holidays.
The USDA reported moderate demand and light offerings in the beef market Thursday. Rib and chuck steaks were weak while round and loin items were firm on choice and weak on select. Trimmings remain firm on good demand and moderate offerings.
Light offerings in the beef market can be linked to lower slaughter this week. Through Thursday, the USDA’s estimated cattle slaughter was 451,000 head, down 7,000, or 1.53%, from 458,000 last week and down 33,000, or 6.82%, from the 484,000 of a year ago.