Cattle Price Comparisons Need Inflation Adjustment

At first glance, it appears fed and feeder cattle prices have reached record highs, but on an inflation-adjusted basis, prices have yet to surpass those of 2013-2015, said Dennis Elliott, Extension livestock economist at the University of Nebraska, Lincoln, in a Livestock Marketing Information Center letter called In The Cattle Markets.

 

FOMC INFLUENCE

 

The Federal Open Market Committee raises interest rates when the economy starts overheating and cuts rates when the economy looks weak, Elliott said.  Before Covid-19, the FOMC held the federal funds rate at around 0% and bought billions of dollars in bonds every month.  As inflation began to rise, the FOMC began to raise interest rates, which are then passed down to banks and ultimately to borrowers.

Livestock producers have not been immune to higher rates but have more recently felt them during this last loan renewal cycle, he said.  Feeder cattle interest rates did not begin to rise significantly until the middle of 2022, going from around 5.5% in Q2-2022 to more than 8% currently.

That is the highest interest rate for feeder cattle since 2008, and unless the FOMC significantly ratchets back on raising rates, it could surpass those 2008 levels.

 

FEEDER RESPONSE

 

Ultimately, higher interest rates squeeze profit margins, and producers will seek to reduce these effects.  On average, a 1% rate increase would decrease feeder cattle prices by 1.14%.

Another change could be a change in the length cattle are on feed and weights cattle are placed in feedlots, Elliott said.  It is typical for cattle feeders to have loans on the feeder cattle and half the feed.  Reducing the number of days on feed by placing heavier cattle would reduce interest burdens.

Many technologies will be available to producers to reduce costs, he said.  Some also will help solve long-running concerns about labor, which also rose significantly above long-run trends beginning in mid-2020.

The rise in wages partly is because of a limited labor supply in rural areas.  Once employees are found, making sure there is adequate training and incentives to stay is necessary.  In any case, finding and keeping good farm labor remain a persistent concern.

 

PROFITS SQUEEZED

 

Last year, prices began to rise but total profit was limited by higher feed and supplement/mineral costs, Elliott said.  Feeder cattle interest rates and labor costs will be persistent in coming years but could be replaced slowly with technology.

Higher interest rates will persist as long as inflation remains higher, he said.  Until it is brought under control the FOMC likely will not cut rates, leading to higher farm costs.

So, higher cattle prices are nice but wide profit margins are better, Elliott said.

 

CATTLE, BEEF RECAP

 

The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $174.50 per cwt to $180.45, compared with last week’s range of $174.86 to $184.47 per cwt.  FOB dressed steers, and heifers went for $276.18 per cwt to $284.12, compared with $269.25 to $292.35.

The USDA choice cutout Wednesday was up $1.61 per cwt at $309.24 while select was up $0.32 at $287.94.  The choice/select spread widened to $21.30 from $20.01 with 72 loads of fabricated product and 26 loads of trimmings and grinds sold into the spot market.

The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.55 to $1.65 a bushel over the Jul corn contract, which settled at $6.01 a bushel, down $0.06 3/4.

No live cattle futures deliveries were tendered Wednesday.

The CME Feeder Cattle Index for the seven days ended Tuesday was $201.31 per cwt, up $0.05.  This compares with Wednesday’s Apr contract settlement of $202.67 per cwt, up $0.60, and May’s $210.27, up $0.85.