Fed cattle trade lower, feeder markets mixed

Cattle Market & Farm Reports, Editorials
Dec 11, 2006
by WLJ
Fed cattle trade was at a standstill last week. Beef sales have been slower than expected and packers are holding more unnecessary inventory than they would like. The boxed beef cutout values have been falling and support is expected to develop at the $140 level, which we’re just $2 away from. Packers are still in negative margin even though it has improved greatly since two weeks ago, but they are still losing $12.25 a head.

Fed cattle trade was expected to develop at the $86 level late Thursday or Friday. Feeders were asking for $87 live and $138 dressed, while packers were trying to take the market below $85, a serious support level.

On the Chicago Mercantile Exchange (CME), live cattle futures were relatively steady last week with the December live cattle contract trading at $86.65 last Thursday, and April at $90.85.

Beef markets have been weaker even though the Choice cutout was stronger by 30 cents at $142.99. The Choice/Select spread is starting to grow again, reaching $17.21 last Thursday. The Select cutout was trading at $125.78, down 61 cents. Trade volume was moderate to light until last Wednesday when volume picked up on the Select product and ground beef. The 90 percent lean was at $130, 50 percent lean trim was $35.40, and the cow beef cutout ended last Thursday at $101.65, down 29 cents from the day prior.

Slaughter levels were starting to grow again last week despite packer losses and threats of cuts in production, mostly because of a lack of cold storage space. Slaughter for the week ending Dec. 1 was at 636,000 head and through last Thursday, packers were already 8,000 head over the prior week's pace, meaning it was possible to reach 645,000 head.
All the industry discussion in recent weeks is around the corn market and ethanol. However, James Mintert at Kansas State University said that the price increase has had little impact on carcass weights.

“Opposing forces will pull weights in different directions during 2007. Improvements in genetics and technology will stimulate an increase in weights. But a sharp increase in feed costs will encourage feeders to market cattle at lighter weights,” Mintert said. “The last time these two forces really opposed each other was in 1996. An examination of what took place that year might shed some light on what’s likely to happen during 2007.”

According to Mintert, corn prices at Omaha, NE, in early 1996 traded at $3.41 per bushel, about 26 percent higher than in mid-August 1995.

“By early July, corn prices were trading at over $5 per bushel, or about 50 percent higher than in early January. Despite the run-up in corn prices during fall 1995, federally inspected dressed cattle weights at the beginning of 1996 averaged 2 percent heavier than a year earlier. But high feed costs began to take a toll on weights as the year progressed. By April 1996, weights were consistently averaging below the prior year, a trend which continued the rest of the year,” he said. “At first, the year-to-year declines in weight were modest, averaging less than 1 percent. However, as the year progressed, the impact of high feed costs on cattle management strategies became more pronounced. The result was weights falling 1 percent, 1.8 percent and 3.4 percent below a year earlier during the second, third, and fourth quarters of 1996, respectively.”

Mintert said a couple of possible implications stand out for the year ahead.

“First, it takes awhile for rising feed costs to impact dressed weights. The fact that weights this fall have not fallen below a year earlier doesn’t mean it won’t happen this winter or spring,” Mintert said. “Second, it’s apparent the relatively large reductions in weights that occurred in late 1996 were motivated by the dramatic run-up in corn prices that took place in late spring and summer of that year. It remains to be seen whether corn prices in 2007 will climb to levels last seen during the summer of 1996. During 1996, dressed cattle weights fell 2.3 percent below the trend “forecast” for 1996. But part of that decline relative to the trend was motivated by the extraordinary corn price increase that took place during the spring and summer of 1996. As a result, weights during 2007 are expected to wind up near their trend level of about 770 pounds, which implies a decline from 2006’s record level of about 1 percent. However, if corn prices increase dramatically during 2007, as they did in 1996, look for an even larger year-to-year decline in weights.”

Feeder cattle

Some early week sell off in the corn market last week allowed feeder cattle to regain lost ground in the marketplace. There is some speculation that corn prices could be facing a correction close to the end of the year, which would certainly help the feeder cattle markets which have been most heavily influenced by the grains since early fall when corn prices began to skyrocket to 10-year highs.

The impact of the corn market can be seen by looking at prices this year compared to last year, or even late summer, when they parted with fed cattle prices which they had been tracing for several months.

“The market value of fed cattle has dropped by 6 percent between early September and mid-November. Kansas feeder cattle prices have slipped by 15 percent in the same period,” said Shane Ellis, economist with Iowa State University. “The cash corn price has steadily increased during the same period, up 58 percent from early September. The effects of corn price on the feeder market are painfully obvious.”

Ellis said the degree of impact corn prices will have on feedlot bottom lines and short-term profitability depends largely on how much stored and contract corn is on hand. He also said access to alternative feeds will play a role in profit margins in the near term.

“Feed costs are likely to continue increasing before we see prices taper off,” Ellis said. He calculated feedlots which are paying $110 per cwt. for feeder cattle and $3.25 per bushel of corn will need $88-90 fed cattle prices next summer to break even.

In last Thursday’s trade on the CME, feeder cattle contracts rose between 60 and 110 points. January feeders were up 77 points, closing at $99.85, and March and April were both up 85 points, to close at $99.40 and $99.95 respectively.

In auction markets across the Rocky Mountains and Plains states, the mood was much improved last week and the better weather also helped to boost prices into mixed territory despite light offerings in most markets. The majority of calves have been sold and yearlings remain in very short supply in all markets. The improved weather, particularly in the central and southern Plains, helped to boost offerings in those areas and the weaned calves on offer met with good demand.

In the south, at the market in Clovis, NM, last Wednesday, compared to the previous week, feeder steers under 600 lbs. and heifers under 500 lbs. sold $3-5 higher, with heavier weights reported to be steady. Meanwhile, in Abilene, TX, compared to the previous week, feeder steers under 500 lbs. were called steady to $2 higher, cattle over 500 lbs. were $1-2 lower. Feeder heifers under 500 lbs. were called $2-4 lower, and those over 500 lbs. were $1-3 lower.

In El Reno, OK, last week feeder steers and heifers were mostly steady except over 800 lbs., which traded firm to $2 higher than the prior week. Steer and heifer calves sold firm, except weaned steers under 500 lbs. and weaned heifers under 550 lbs. which got a good boost $5 to, in some instances, $10 higher than the previous week’s heavily storm-influenced market. Demand was called good for all classes, with several strings of long time weaned calves which saw considerable bidding activity.

In the central region at Joplin, MO, compared to the prior sale which was also affected by the storm, steers under 550 lbs. were mostly $2-5 lower and heifers under 500 lbs. were $1-3 lower. Steers over 550 lbs. and heifers over 500 lbs. were called steady on moderate demand and light supply as a result of continued icy conditions on rural and secondary roads in the area.

In Dodge City, KS, steers and heifers 300-700 lbs. were steady to firm in a very limited supply. Heavy steers from 700-1,075 lbs. were called $2-3 higher, while heavy heifers from 700-900 lbs. were $1-2 higher. At the sale in Loup City, NE, last week, feeder calves under 700 lbs. trended steady to $2 lower. There was reportedly not much comparison for calves and yearlings over 700 lbs. because of the shortage of heavy calves in recent weeks, but bidding was reported to be very competitive. Cattle quality was called average to good, with moderate to good demand.

Farther north, where receipts in most markets were seasonally light, in Torrington, WY, steer and heifer calves traded unevenly steady, with not enough yearlings on offer for market test. Demand was reportedly moderate to good on offered lots. In Billings, MT, compared to the prior Monday, steer and heifer calves were rather steady in a light test. Demand was moderate on limited offerings.

In Davenport, WA, last week, feeder cattle were steady to $4 higher, with the most advance on weights under 500 lbs. Trade was active with good demand. In Madras, OR, steers and heifers in the 500-600 lb. class were steady while 600-700 lb. steers were $4-5 higher and heifers were $2-3 higher. Heavier weights were mostly steady with the exception of 700-800 lb. heifers, which were as much as $5 higher than the previous week.