Last year’s wider-than-normal price spread between southern Plains fed cattle and their more northern counterparts is gone for now, but the elements are in place to regenerate it this year.
The question is: “how wide can it go?” asked independent market consultant Nevil Speer, in a telephone interview.
“There is a tug-o-war going on between the packer and retail (grocers and restaurants),” Speer said. “And the packer is losing money right now.” Yet, neither side can stand to lose.
DIGGING IN
The crux of the issue is the cost of shutting down slaughter capacity versus the cost of restarting it again at some point down the road.
There aren’t enough fed cattle to go around, causing packers to widen their geographic search for cattle to feed their plants, Speer said.
And there’s a limit to what consumers will pay for beef. Through the holiday season, many consumers just swallowed hard and bought that rib roast of steak anyway because it was a holiday staple for them. But will they keep buying choice beef in as great a quantity? Many analysts are doubtful.
A LITTLE HISTORY
The spread began widening about two years ago after adding packing capacity in Texas. This increased the demand for fed cattle at a time when tried-and-true supply chains weren’t up to the task.
Last summer, the premium being paid for cattle with prime-graded carcasses garnered as much as $90 per cwt more than those grading select, Speer said. This could mean as much as $800 a head extra. And the choice/select spread reached $25 to $27 per cwt, yielding around $500 a head.
“It doesn’t take much to warrant (the packer) paying an extra couple of dollars (per cwt) for the live cattle,” he said.
Some cattle were being trucked long distances to feed kill schedules, Speer said. There is too much money at stake to idle a plant. Interest payments, trained employee losses and lost beef customer base all must be guarded against.
The supply/demand situation got worse this year as corn prices surged and drought-induced herd reductions took hold. Many feedlots were operating at less than capacity as they tried to cope with high feed costs coupled with high feeder cattle prices.
At this time of year, it’s hard to tell if herd reductions are continuing. Seasonal, large-scale weaning and herd culling are done, leaving only the wintertime cow sales.
If the drought continues, and pastures become thin again, more herd reductions could be seen. Already, with the reductions of the last two years, a smaller calf crop can be expected.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $154.80 to $160.00 per cwt, compared with last week’s range of $156.00 to $158.90. FOB dressed steers, and heifers went for $244.52 to $249.16 per cwt, versus $245.49 to $251.62.
The USDA choice cutout Thursday was up $0.47 per cwt at $268.75 while select was off $0.32 at $251.48. The choice/select spread widened to $17.27 from $16.48 with 94 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 $1.70 to $1.90 a bushel over the Mar corn contract. Bids in Kansas were steady at $0.85 over Mar, which settled at $6.82 1/2 a bushel, up $0.07 3/4.
The CME Feeder Cattle Index for the seven days ended Wednesday was $178.80 per cwt, up $1.02. This compares with Thursday’s Jan contract settlement of $179.57 per cwt, up $0.17, and Mar’s $182.85, down $0.90.