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Weighing The Market

published: October 20th 2017
by: Wes and Sharla Ishmael

Demand continues to underpin cattle prices

Despite significantly more feedlot placements than expected in last month’s Cattle on Feed report—and the brief bearish futures prices that followed—calf and feeder cattle prices continue at higher levels than many anticipated.

“Some may be asking themselves why feeder cattle prices remain elevated given the increased number of cattle, the expectation for increased meat production in the beef, pork and poultry sectors, and relatively low finished cattle prices,” says Andrew P. Griffith, agricultural economist at the Univer-sity of Tennessee, in his mid-October weekly market comments. 

Griffith starts his explanation with low feed costs.

“…December corn futures prices have been hanging around $3.50/bu. for two months now,” Griffith explains. “Given expected corn production this year, there is little concern of corn prices rallying to the upside. Additionally, the cash corn price in many cattle feeding states is closer to $3 given the highly negative basis…”

If USDA is correct, corn production this year will end up being the second most in history at 14.3 billion bu., according to the latest World Agricultural Supply and Demand Esti-mates (WASDE). Those estimates project the season-average corn price received by producers at $2.80 to $3.60/bu. 

Next, Griffith explains, “The February and April live cattle futures prices are trading in the $121 to $122 range, which provides cattle feeders the opportunity to bid current levels for feeder cattle. Some cattle feeders may be even betting on stronger prices in the spring, which makes them feel like they are getting a good deal at today’s feeder cattle prices.”

Winter Feeder Cattle futures contracts are also offering stocker producers with added opportunity.

“A strong rally in Feeder Cattle futures since late August offers im-proved winter stocker profit potential,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State Univer-sity, in his early-October market comments. “At current levels, March feeder futures would allow a 750 lb. steer to be priced at roughly $150/cwt. in Oklahoma. A 475 lb. steer at today’s prices would have a March 1 breakeven of $130-$137/ cwt. at 750 lbs. depending on pasture and other costs. Such opportunities to price in winter stocker margins are rare and generally fleeting.”

Finally, Griffith points to international and do-mestic beef demand.

Domestically, beef de-mand indexes that rely on grocery store scanner data—actual prices paid for specific cuts and volume of beef—suggest demand is running stronger than indicated by more traditional barometers.

According to Glynn Tonsor, agricultural economist at Kansas State University (KSU), the new indexes say that domestic consumer beef demand is higher year over year for much of this year. He and fellow KSU ag economist, Ted Schroeder constructed the new indexes for consideration by the Beef Board.

Internationally, U.S. beef exports continue significantly higher, according to statistics released by USDA and compiled by the U.S. Meat Export Federation (USMEF).

Through August, U.S. beef exports are 10% higher in volume compared to last year and 16% higher in value at $4.65 billion. 

For the month of August, volume was 5% more year to year at 112,069 metric tons (mt) and value was the second-highest on record at $679.1 million, up 20% from a year ago. 

Export value per head of fed slaughter averaged $290.05 in August, up 13% from a year ago. Through August, per-head export value was up 9% to $275.81.

“As we head into the final quarter, 2017 is shaping up as a very solid year for red meat exports but one in which the U.S. industry still faces significant challenges,” says USMEF CEO Philip Seng. “We have new pork plants coming on line and strong cattle-on-feed numbers, which sends a positive signal to our international customers about product availability. But the international markets are in-creasingly competitive, so we must continue to ag-gressively pursue new opportunities for U.S. red meat products in both our traditional mainstay destinations and in emerging markets.”

On the other side of the trade equation, Peel notes that beef imports to the U.S. were 2.8% less year over year through August, while live cattle imports were slightly higher.

“For the year to date, total cattle imports are up 3.9%, with imports from Canada down 16.5% and imports of Mexican cattle up 21.7%,” Peel says in his Oct. 9 market comments. “Canadian feeder cattle imports were down 34.0% through August and slaughter cattle imports were up 9.7%. Slaughter cattle imports from Canada for the year to date consist of 68.8% slaughter steers and heifers and 31.2% slaughter cows and bulls.”

Total feeder cattle imports from Canada and Mexico were up 9.7% for the January through Au-gust period, Peel says.

“Year to date, feeder heifer imports from Mexi-co have more than doubled from last year with heifers making up 15.3% of feeder cattle imports from Mexi-co,” Peel explains. “In-creased heifer imports from Mexico may be a reflection of stronger domestic Mexican demand for steers to support growing feedlot production in Mexico, leaving heifers to make up a bigger share of cattle exports.  It may also signal slowing heifer retention and herd growth in Mexico as heifer exports compete with domestic breeding demand for heifers.”  

Steers imported from Mexico are up 13.6% year over year through August, Peel says. 

Continued demand strength will be essential to clearing the market at producer-friendly prices as the nation’s beef cowherd and beef production continue to expand.

“The beef herd expansion we've seen from 2014 to 2017 has been the most aggressive three-year start to any expansion on re-cord,” says Trevor Amen, animal protein economist at CoBank. “Recent slaughter numbers and the cattle on feed mix indicate the expansion rate is slowing, but barring any significant export market disruptions or weather events, expansion will continue through the end of the decade.”

USDA estimates the 2017 calf crop will top 36 million head, an increase of 2.9% over 2016 and an 8.3% more compared to the cyclical low calf crop in 2014, Amen says.

ERS estimates beef production this year at 26.5 billion lbs. and total red meat and poultry production at just north of 1 billion lbs.

“Though the calf market has remained fairly strong through mid-Octo-ber, purchasers of these animals face several risks that are accounted for in the market price,” Griffith says. “There will likely be continued pressure on freshly weaned calves moving through the next month and a half as morbidity and mortality rates become more of a concern.”

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