Grain, transportation costs continue to grip feeder markets

Cattle Market & Farm Reports, Editorials
Aug 22, 2008
by WLJ

Grain, transportation costs continue to grip feeder markets

Last week offered good insight into the current state of the cash feeder cattle markets, especially in the western U.S., as Western Video Market and Superior Livestock Auction both held large sales. As buyers in the Midwest begin to bid up for the higher quality runs of calves they find in local auction markets, the large video sales gave a good sample of what both lightweight and heavier feeder cattle are worth throughout the Plains and West.

For weeks now, high grain prices have caused buyers to seek out heavy feeders to reduce the time required the finish the cattle out. Less grain in equals lower input costs, which can help feed yards cut heavy losses and in some cases, help the operation remain in the black.

High fuel costs have contributed to a wide basis on cattle coming out of areas far removed from feeding operations and grain production, as evidenced by the heavy discounts on lightweight feeder cattle which often sell below the heavies on a price-per-cwt. basis.

Darrell Mark, agricultural economist with the University of Nebraska-Lincoln, says the current state of the feeder cattle market makes sense, given the high cost of inputs.

"There are pretty understandable forces driving the feeder cattle market right now," he said. "It’s really Economics 101 in some respects. Softness in the cash market is to be expected, and it gets worse the further away you get from feed yards or grain."

Volatility in the corn markets is not through yet, said Mark, who pointed out that even once harvest starts, grains will be on a roller coaster ride until a firm grip on the total harvest amount is established.

"There’s so much risk right now in terms of what corn is going to do that the uncertainty in those grain markets will keep feeder cattle on the defensive. The projections are for a corn crop that will be adequate, but there’s still a lot that can happen between now and harvest. There may be some surprises, and the crop is not in the bin yet."

High transportation costs and expensive grains are production factors that are not likely to go away any time soon, said Mark, who also mentioned the increased demand for heavier feeder cattle.

"People are definitely responding to feed costs by trying to cut the number of days on feed down and especially in areas far removed from grain sources, the heavy feeders are selling at a premium to the lighter calves," Mark pointed out. "I don’t see any reason to believe that this trend will change within the next year. In certain local markets, there may not be a discount for lightweight feeders, but on a national basis, the economic forces that are causing this to happen will likely still be in place for awhile."

Despite the way the numbers appear on the surface, Mark says he believes the discounted lightweight cattle may offer savvy buyers an opportunity.

"Using numbers penciled out from a couple weeks ago, you may actually be able to take the lighter weight calves at a discount and get better returns on them, even though you’d have to feed them longer," he explained. "At the time, projections showed almost a $40/head difference in favor of a 550 lb. calf versus a heavy yearling."

Even so, he adds, the risk in purchasing lightweight calves is high if you are unable to keep a tight lid on feed costs.

"Maybe people should be taking a look at these lighter weight calves, but you can’t just throw caution to the wind. You definitely have to buy them at a discount, then hedge your corn and hedge the cattle. The deferred futures look good to be able to do that, but the risk might still be too high."

Western Video Market’s Cheyenne sale offered 122,000 head, by far the most ever for that sale. Lots from all over the west and Plains were offered and were met by firm demand.

Steers in a lot of 135 head coming out of Nebraska with a base weight of 840 lbs. brought $114.50. Steers with an 800 lb. base weight in a lot of 125 head sold at $114.10, also coming out of Nebraska. A large group of 800 head of Wyoming steers with a 925 lb. base weight sold for $108.60, while another good group of Wyoming feeder steers numbering 410 head sold for $112.50 at an 850 lb. base weight. A lot size of 272 head of Kansas steers weighing 810 lbs. sold at $114.50. Steers from South Dakota in a lot of 148 head sold for $113.85 with a 750 lb. base weight. Montana steers in a lot numbering 140 head and weighing 950 lbs. sold for $108.00, while a group of 109 steers from Idaho and a base weight of 975 lbs. sold at $101.50. Seventy head of weaned steers from Nevada with a base weight of 800 lbs. sold for $107. Oregon steers in a 218-head lot and an 880 lb. base weight sold for $106.10, while another group of 215 head from the same state weighing 900 lbs. sold for $104.25. Steers carrying a base weight of 830 lbs. in a lot of 295 head from California brought $108.75, while a load of 67 steers from the same state weighing 740 lbs. sold for $111. Weaned steers from Colorado in a 65-head group and a base weight of 670 lbs. brought $114.50.

Superior Livestock Auction sold 84,000 head of cattle on the first day of their sale which offered 181,000 total head. Averages from region one, which includes California, Nevada, Oregon, Washington and Idaho, saw steers with a base weight of 700-725 lbs. sell between $95-110.50, and 850-890 lb. steers go for $101-105.50. Region two, which includes Montana, the Dakotas, Nebraska, Utah and Colorado, had 700-740 lb. steers selling for $104-115, while 850-885 lb. steers brought $106.75-113.50. Region three, which includes Arizona, New Mexico, Texas, Oklahoma, Arkansas and Louisiana, saw 700-745 lb. feeder steers selling from $95 to $116, while steers at an average base weight of 850 lbs. sold for $101.50-108.25.

At the Oklahoma National Stockyards in Oklahoma City, OK, a total of 7,223 head were offered, where compared to the week prior, feeder cattle and calves were steady with good demand for calves. Demand was moderate to good for feeder cattle, despite corn futures which closed sharply higher on sale day. The quality of offerings continued to be below average with many consignments of No. 2 cattle included. Steers weighing an average of 721 lbs. sold for $114.99, while 736 lb. feeder heifers sold for $108.78.

The Joplin Regional Stockyards near Joplin, MO, offered 4,711 head for sale last week where steers under 500 lbs. were steady to $2 higher, with weights from 500-700 lbs. steady and weights over 700 lbs. steady to $2 lower. Heifers were mostly steady. Demand and supply were moderate and the bulk of the offering consisted of yearlings or weaned calves. Buyers paid $112.27 for steers weighing an average of 733 lbs. while 717 lb. heifers sold at $105.52.

Last week’s Winter Livestock Feeder Cattle Auction in Dodge City, KS, saw receipts of 1,963 head where steers stayed steady on a light offering. Heifers also remained steady. Steers weighing an average of 707 lbs. sold at $114.50 while 745 lb. heifers brought $111.

A total of 4,150 head were received last week at the Bassett Livestock Auction in Bassett, NE, where the only testable weights for feeders were for those over 750 lbs. In that category, steers trended fully steady, with heifers trading steady to $2 lower. Receipts included a fairly even mix of fall calves and long yearlings. Feeder steers weighing 716 lbs. sold for $127.41 while heifers weighing 711 lbs. sold at $112.77.

Fed cattle

Fed cattle trade was mostly lower last week as a sagging cutout and weak futures markets failed to provide any lift ahead of the Labor Day holiday. The majority of trade in the south came in $1-2 lower than the prior week at $98-99 live while the Corn Belt cattle feeders traded steady to $3 lower in a range of $153 to $156.50 dressed and $98-98.50 live last week. Nebraska trade was not fully developed at mid-day last Thursday, although light trade was reported at $155-156 dressed.

Packers were buying for a holiday-shortened week and demand was reported to be moderate for cattle as most had already fulfilled orders to meet weekend demand.

The lackluster consumer demand also translated into a weakening cutout which was led lower by the middle meat complex, with ribs and loins showing the biggest drop last week. Morning prices last Thursday stood at $162.67 on the Choice product, down 42 cents from the previous day’s level, while Select was up 26 cents at $157.30. Slaughter volume for the week stood at 505,000 head, down 7,000 from the prior week’s robust pace as packers slowed production to match demand and maintain margins ahead of what is largely expected to be slowing domestic demand.

Analysts have been cautioning that the pricing structure this fall is most likely to be driven by the demand side of the equation. Fed cattle supplies are predicted to be tight through the fourth quarter, however, they cautioned that any weakness in movement on the consumer side of the equation could translate into weaker prices being paid for fed cattle supplies, regardless of supply levels. Export markets will continue to be a key factor in determining prices into next year as the domestic economy treads water and consumers direct grocery dollars to lower priced competing proteins.

Ahead of last Friday’s cattle on feed report, analysts across the board were predicting on feed numbers would continue below year-ago levels while placement numbers and marketing volumes were expected to be significantly stronger than last year. Average estimates for numbers of cattle on feed were expected to be down about 3.5 percent from Aug. 1, 2007, while July placements were predicted to be 6 percent to 7 percent higher than a year earlier. Marketings were estimated 2 percent higher during July than in 2007.

Some of that expectation was already priced into the futures markets last week, which were showing some strength. August futures were up 65 points at mid-day last Thursday at $101.35 while October was up 80 points at $105.80 and December traded 60 points higher at $106.95. The higher prices on the Chicago Mercantile Exchange came despite the higher placement expectations and surging corn markets. The belief that USDA’s corn forecast was off the mark, to the high side, added strength to the grain markets last week as crop tours got underway to examine actual crop conditions in the field across the major growing regions.

Export sales last week continued to be very supportive of beef prices with net sales of 20,200 metric tons reported by USDA’s Foreign Agriculture Service. South Korea has jumped back into the market as a major player despite reports in the press that demand was weak. Last week, the Koreans were the largest foreign buyers of U.S. beef, with shipments totaling 8,500 metric tons, besting Mexico, the former heavyweight, by 800 metric tons.

Cow and bull prices have been one of the highlights during the first half of the year, however, prices were under pressure last week as focus shifted to other meats as a result of the higher prices being paid at the consumer level for ground beef and cow cuts. However, despite the backward slide in the market, prices remain very strong as a result of demand and a lack of significant imports of lean beef for blending from foreign producers. Last week’s cow beef cutout stood at $139.62, compared to just $117.86 a year ago. The 90 percent leans last week was also sharply higher than 2007 levels, trading at $175.08, nearly $30 higher than the same date last year. The 50 percent trim market last Thursday was more than double year-earlier prices at $100.16. — WLJ