Feeder/Fed Cattle Price Relationships Adjusting

What a difference a year makes.  After last year, when cattle feeding profits were the second largest going back to the early 1970’s, this year will go down as the worst ever for cattle feeders.

Economists estimate it will take several years for US feedlots to climb out of this year’s profitability hole, even though the feeder and fed cattle markets are beginning to adjust.

By and large, cattle feeders are an optimistic lot, at times placing calves into the feedlot that cannot be hedged into the futures market at a profit in hopes the fed cattle market will rise enough to make their placements work out – betting on the come, in poker terminology.

 

COMPETITION RULES

 

That’s what happened this year, but it wasn’t all the cattle feeders’ fault.  After years of drought and poor returns, the US cattle herd reached 63-year lows, so when the rain finally returned to green up the pastures again, cow/calf producers last year made the decision to keep some of their heifers for breeding.

However, that essentially created competition for those heifers, and feeders responded with their wallets in an attempt to entice cow/calf producers to sell those heifers for feeding.  Along with the greening of US pastures, the rain brought a record corn crop and lower feeding costs.

By last summer, cattle feeders were placing calves that had no hope of turning a profit without astute hedging, and the trend continued into this year.  Feeders were betting that fed cattle prices would keep rising and at least allow them to cover some of their costs and keep the feedlot from even heavier losses that would come if the pens weren’t full.

That didn’t happen.

 

COMPETING MEAT SUPPLIES

 

A monkey wrench was thrown into the cattle market works as hog and chicken producers also responded to lower corn prices and ramped up pork and chicken production.  A rising US dollar in currency markets brought in more beef imports and stymied exports of all meats.

Suddenly, retail grocers and restaurants had more choices.  They didn’t have to keep chasing an elusive beef market, and they could compete with other food outlets for consumer dollars with cheaper pork or chicken.

Whether the shift to alternative meats was material or marginal made no difference.  The threat was there, and beef packers had to compete.

The resulting back-up of beef, pork and chicken supplies in cold storage brought fed cattle prices down, leaving feedlots feeding expensive feeder cattle and being forced to sell them at record-heavy weights for record losses.

 

THE TIMES THEY ARE ACHANGIN’

 

But over the last few months, the cattle markets have been adjusting, with fed cattle prices declining dramatically and feeder steer prices adjusting even more.  These price relationships likely aren’t done changing as more calves from the increased cow herd are presented to the market.

The heifers held for breeding this year will produce their first calf next year, and these calves will be offered for the feedlot later in the year.  Lower feeder cattle prices are in the works.

But then there’re those pesky hogs and chickens.

 

CASH FED CATTLE MARKETS LEAK VALUE

 

Cash fed cattle markets Thursday were about steady with early week sales at $123 to $125 per cwt on a live basis.  This is down from the $124 to mostly $127 seen last week.  Cash action at lower prices demoralized the futures market, taking Dec down $6.25 per cwt in the last two days.

Small, widely scattered dressed-basis trades continue to be reported at $195 per cwt with a few up to $128, steady to $3 higher than last week.

Wholesale beef prices Thursday were higher.  The USDA choice cutout was up $0.41 per cwt on the day at $204.49, and the select cutout was up $0.77 at $193.02.  The choice/select spread narrowed to $11.47 from $11.83 on Wednesday, and there were 85 loads of fabricated product sold into the spot market.

The CME Feeder Cattle Index for the seven days ended Wednesday was $170.78, down $1.58.  This compares with the Jan settlement Thursday of $159.75, down $0.97.