Herd Rebuilding To Tighten Feeder, Packer Margins

Weather and pastures permitting, cow/calf producers this year are expected to begin the slow process of reversing course and rebuilding the US cattle herd.

Market analysts agree the changeover will be slow as producers weigh the prospect of higher returns down the road for income from immediate sales of heifers.

Feedlots also will have a harder time making ends meet.  University of Tennessee Agricultural Economist Andrew Griffith said in a letter called Tennessee Market Highlights that last week’s fed cattle prices provide slim margins for reinvestment in feeder cattle and feed.

Beef packers also are finding profit margins squeezed at current open-market cash cattle prices, Griffith said, although others say that with the high level of contract and packer-owned cattle being slaughtered each week, the large packing companies may be doing better than it looks on paper.




“As cattle availability dwindles, especially when heifer retention begins, price levels will increase, but it may simply mean a smaller return on investment if margins do not improve,” Griffith said.

“There could be continued consolidation the next couple of years if inefficient feedlots are squeezed,” he added.

Fed steer prices last week were “in excess of $2,600 per head,” Griffith said.  “This does not provide much profit margin for the packers paying these prices.

“From the feedlot perspective, they are replacing those animals with $1,900 per head steers weighing 800 pounds.  This swap provides $700 to be used toward 600 to 700 pounds of gain on cattle entering the feedlot.”




Choice boxed beef prices last week lost all of the previous week’s gains and then some, Griffith said.  Prices two weeks ago “were simply a weather premium due to reduced beef production caused by poor weather conditions across many regions of the country.”

Despite last week’s return to lower pricing, there is little to no concern about underlying beef demand, even though concern still lingers about beef prices and the general economic conditions influencing consumers domestically and internationally, he said.

Beef demand has been resilient over the last four years, and nothing seems to be pointing toward breaking this resilience, Griffith said.  However, the spread between wholesale choice and select beef prices from the USDA is narrowing as consumers focus on slow-cooked cuts like roasts and stew meat.

There could be a few more weeks of narrowing for the choice/select spread as the winter continues to unfold, he said.  Many market traders and analysts will be watching the USDA spread carefully as warmer temperatures begin returning to the contiguous 48 states.

It also will be interesting to see how wide the spread gets as herd rebuilding begins and supplies get tighter.




The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $175.15 per cwt to $180.00, compared with last week’s range of $172.98 to $178.85 per cwt.  FOB dressed steers, and heifers went for $275.52 per cwt to $282.45, compared with $272.94 to $280.41.

The USDA choice cutout Wednesday was up $0.91 per cwt at $294.98 while select was up $0.82 at $285.42.  The choice/select spread widened to $9.56 from $9.47 with 132 loads of fabricated product and 22 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 $1.35 to $1.45 a bushel over the Mar corn contract, which settled at $4.34 1/4 a bushel, down $0.04 1/2.

Ten heifer and six steer delivery intentions were posted and demanded Wednesday for the Feb live cattle contract.

The CME Feeder Cattle Index for the seven days ended Tuesday was $240.62 per cwt, up $1.04.  This compares with Wednesday’s Mar contract settlement of $245.55, down $1.12.