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Weighing The Market

published: August 20th 2021
by: Wes Ishmael

Cattle prices poised for extended run higher

Cash calf and feeder cattle prices continue catching up to futures market optimism as supply fundamentals improve. In fact, CattleFax analysts say cattle prices should remain on a higher trend at least through 2025.
    Domestic and international beef demand is strong and appears to be growing. Cattle numbers are declining cyclically, accelerated by the current drought. Leverage will return to producers as front-end fed cattle supplies decline.
    CattleFax detailed reasons for bullishness earlier this month, during its Out-look Seminar in Nashville, Tennessee.
    Kevin Good, CattleFax vice president of industry relations and analysis said cattle inventories peaked at 94.8 million head in the most recent cattle cycle. During the current contraction phase, CattleFax expects the feeder cattle and calf supply will decline roughly 1 million head from its peak. In the meantime, Good says fed cattle slaughter will remain larger year over year through the remained of 2021 as carryover from pandemic disruptions works through a processing segment hindered by labor issues.
    For perspective, Randy Blach, CattleFax CEO pointed out front-end supplies — on feed more than 150 days — were less than a million head as recently as 2016. They were 3 million head last summer at the peak, fueled by pandemic-induced supply chain disruptions.
    “While fed cattle slau-ghter nearly equals 2019 highs at 26.5 million head this year, we expect a 500,000-head decline in 2022,” Good explained. “This, combined with plans for new packing plants and expansions, possibly ad-ding near 25,000 head per week of slaughter capacity over the next few years, should restore leverage back to the producer.”
    For next year, CattleFax projects: steer calf (550 lbs.) prices to average $200/cwt., which would be $30 more than this year; feeder steer prices (850 lbs.) to be $20 higher at an average of $165/cwt.
    In the July Livestock, Dairy and Poultry Out-look, analysts with USDA’s Economic Research Ser-vice (ERS) boosted expected average feeder steer prices by $5/cwt. for the fourth quarter, based on current price strength.
    Projected average feeder steer (750-800 lbs., Oklahoma City) prices are $146/cwt. in the third quarter and $148 in the fourth quarter for an annual average of $142.13. Next year, prices are forecast to be $144 in the first quarter and $142 in the second quarter with an annual average price of $146.50 in 2022.
    CattleFax expects bred cow prices to average $1,750 next year, which would be $125 more than this year. Utility cow prices are forecast $6 higher at an average of $70/cwt.
    In the meantime, Andrew P. Griffith, agricultural economist at the University of Tennessee notes, “Deferred feeder cattle futures continue to trade at a premium to the feeder cattle index and the August futures contract price with essentially a $10 gain priced in between today (mid August) and November…the futures market is providing owners of these cattle to price the cattle $10 higher than today’s market, assuming basis expectations hold.” That’s from his weekly market comments at the time.
Fed cattle prices hold steady
    Negotiated cash fed cattle prices remain range-bound, albeit at contra-seasonally higher levels, buoyed by extraordinarily resilient wholesale beef values.
    Live prices in mid-August ranged from $121/cwt. in the Southern Plains to $123-$126 in the North. Dressed prices were $198-$203.
    “Cattle feeders continue to be willing buyers of feeder cattle as they fill pens for January and February slaughter,” Grif-fith explained. “Live Cattle futures are supporting the higher cash prices being paid for feeder cattle. However, cattle feeders are still betting on higher fed cattle prices in 2022.”
    ERS increased the projected annual average five-area direct fed steer price this year by $2 to $121.20/ cwt., based on current price strength and firm demand. The estimated annual price for next year increased by $4 to $126. That’s in the latest World Agricultural Supply and Demand Esti-mates (WASDE).
    The average fed steer price was projected at $124 in the third quarter, $127 in the fourth quarter and $131 in the first quarter of next year.
    Some of that bullishness is based on lower expected beef production this year and next.
    CattleFax forecasts the average fed steer price next year to be $135/cwt., up $14 from this year. That’s with the forecast average carcass composite price at $265/cwt., up $5 from this year.
Careful the wishes
    Blach cautioned seminar participants about inviting the government to fix the industry’s market “problem.” He was referring to some lawmakers and producers pushing for mandated regional minimum cash trade each week.
    Blach pointed out consumer beef demand began growing, and continues to grow, when the industry churned out more beef that provided a more reliable eating experience. Pro-ducers grew the percentage of cattle grading USDA Choice and Prime. Con-sumers continue to de-mand more and are willing to pay higher prices. Producers grew the Choice and Prime supply because of economic incentive.
    Blach shared closeout data from a recent pen of cattle, a pen many would regard as industry-typical. The difference in value from the most valuable to the least valuable was $684. If those cattle sold on the average market the week they were hung on the rail, they would have brought $120/cwt. Via grid pricing they sold for $128.
    “This is why our markets have done what they’ve done,” Blach explained, noting the industry transition from selling on the average to alternative marketing arrangements that enable premiums and discounts.
    Blach also shared results from a recent CattleFax survey of cow-calf producers indicating more of them are retaining ownership in more of their cattle through backgrounding and a phase of stocker production or all the way through the feedlot.
    “They’re making huge investments in their genetics, focused on the market that will pay them more than what they could get selling them as calves off the cow. If we take all of these premiums away, who’s it really going to hurt? It’s going to hurt the cow-calf producers,” Blach said.
SLS

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