It's a cow market
It’s been quite a February for the cattle markets, reaching new highs when demand is typically at its lowest. It’s amazing that beef demand has held up with average retail prices reaching a new high of $5.25. Now it appears beef is in a market of its own and competing with pork and poultry isn’t even a thought.
After the post-holiday rally in the beef markets when the Choice cutout touched $250, we settled into a trading range of $210-220. But packers are cutting back production levels to maintain the cutout values for beef. Packers have consistently been losing $100 per head the past month. Supplies of fed cattle are at their seasonal low and packers are struggling to find a margin and maintain some processing efficiency. It is very possible we could see another packing facility close to align packing capacity with cattle supplies.
Meanwhile, cattle feeders are enjoying good margins and, with feeder cattle in short supply, they have all the incentive to make the cattle bigger. The positive basis will help keep cattle moving through the system, however. Andy Gottschalk at Hedgers Edge is keeping an eye on carcass weights. With processors slowing down slaughter levels and weekly production rates at 539,000 head two weeks ago, and perhaps 550,000 this week, anything below 575,000 head next week will start to set the stage for feeders to become less current on their marketings. A backlog of cattle could develop.
Market logic would suggest the fed cattle markets will move lower into the second quarter. As Steve Meyer of the CME Daily Livestock Report points out, the number of cattle on feed for more than 120 days is 19 percent below last year and the number of cattle on feed more than 90 days is down 9 percent, so supplies will be more available as we move into a seasonally better market for beef.
Gottschalk also said, “The cutout is rebounding from reaching initial support levels of $206-$210. The initial price objective for this recovery is $220 and then $225. Retailers wasted no time raising beef prices and the newer and higher price of $5.25 can support a maximum live cattle price of $144 and a maximum cutout of $214. Price movement beyond these levels will eliminate any retail margins once again and will lead to additional and rapid advances in beef prices.”
Feeder cattle prices should remain strong as feeders tend to spend all their profits on replacement feeder cattle. Calf prices will also remain strong as we start to warm up and grass fever starts to develop. The long-term outlook for cow/calf producers remains strong for the next few years.
Cattle marketings in the last Cattle on Feed report showed January marketings 5.5 percent lower than a year ago, which may have more to do with packers trying to overcome large negative margins by reducing slaughter levels. Demand has been reported as fairly good for available beef supplies. Beef production is down 8 percent year-to-date. However, beef exports are down. Gottschalk adds, “The high price of beef and cheaper beef coming out of Australia, Argentina and Brazil, coupled with declining currency values, has intensified the competition in the export market for beef. Those factors combined to reduce U.S. beef exports 15 percent over year-ago levels as reported in the weekly comprehensive cutout data series.”
One aspect of the market that could get wild is the lean grinding beef market. Cow slaughter is already 14 percent lower than the same time a year ago. The 90 percent lean market touched a new high Friday, Feb. 21 at $250.68 cwt. This price was 16 percent higher than a year ago, but was 31 percent higher than the market for 90s last fall.
The seasonality of the grinding market is driven in part by a distinct variation in the flow of cows to slaughter; more come in the fall. In 2010 through 2012, the price of boneless 90s appreciated about 40 percent from the fall seasonal low through the spring seasonal high. And as cattle prices have steadily increased in the last five years, seasonal peaks continued to push to all-time highs each year.
In other words, those cull cows will be more valuable in the coming months with cow prices at or near $100 cwt. Producers could afford to feed some cows into the high-demand season for cows in April, May and June this year. Ground beef supplies are short worldwide and over half of domestic production is consumed as ground beef. These cow markets are ripe for good rewards. — PETE CROW