COMMENTS

Opinion
Jan 23, 2009

Danger zone

Danger zone
Cattle processing has been a bit short of expectations so far this year. Two weeks ago, packers processed only 608,000 head and last week, it looked like it would be somewhere around 620,000 head. The reduced production is almost always an effort to raise boxed beef values and improve margins and it generally works.

The beef cutout was over $152 per cwt. at midweek last week, but it produced only moderate movement which would be at the low-end of respectable, with just over 1,300 loads moving through the five-day average. Packers were earning a nice $80 a head on processed cattle. It is surprising that feeders were not able to take any of the packer margin away last week with most fed cattle selling at $82 live. So far during January, the industry has processed roughly 330,000 fewer cattle than the first three weeks in 2008. That’s down 19.8 percent from a year ago. The last couple months of 2008 were also down 296,000 head from year-earlier levels. Regardless of the number of cattle in feedlots, it would appear that the lack of demand is starting to stack cattle up. Cash live cattle markets have been trading at a premium to cattle futures for the past several months, which is about the only positive signal I can see at this point. But cattle futures didn’t do us any favors last week with the February contract declining nearly $3 when the week-earlier market appeared to have a little stability. However, under normal economic circumstances, the market would be higher, perhaps not as high as the $118 February contract high indicated last summer, but higher.

The cattle on feed report is expected to show us cattle placed into feed yards was near normal for December. The average market analyst guess was that the industry placed just one-tenth of one percent more cattle into feed yards than last year. Total cattle on feed numbers are expected to be down 6.1 percent from a year ago, suggesting that supplies should be in check with expected marketings, which were expected to be down seven-tenths of a percent.

But, there were two additional marketing days, which would normally account for an additional 8-10 percent of marketing volume.

Breakevens for fed cattle are roughly $104 for cattle currently being slaughtered. The feeder cattle market was a bit stronger with Superior Video Auction reporting yearling cattle trading at the $95-96 level for 800-pound steers and we have had reports that cattle currently being placed in feedlots are going in with an expected breakeven of $88-90.

Dry conditions in the southern Plains’ wheat grass country are prevailing and will start sending lighter than normal yearlings into feedlots. A year ago, wheat prices were so good that growers elected not to place any calves on grass to protect yields.

That forced many lighter cattle into feedlots early. Cow/calf operators have also been retaining ownership of their calves into feedlots over the past few months. Lower feed costs and low prices for calves were a big motivator.

Mexican imports of feeder cattle surged last week with over 17,000 head crossing. This is up nearly 100 percent from the same time last year. So far though, only 18,000 head have crossed into the U.S. this year. We have also heard reports that Mexican cattlemen are retaining ownership into southern Plains feedlots. The U.S. still represents the most liquid market for Mexican feeder cattle even with the shadow of country of origin labeling.

Five to six weight Mexican steer calves were trading at $75-80 last week; 500-600 pound domestic calves traded at $95-105.

The next threat to the markets will be the dairy buyout, which was recently lumped into the congressional stimulus package. The plan is to have a wholeherd buyout of 320,000 milk cows. Generally unannounced is the number of replacement heifers, bull calves and other classes of dairy cattle associated with buying out the entire herd. Jim Robb at the Livestock Marketing Information Center said this dairy buyout could include 800,000 head when it’s all done. He also reminded us of the 1986 fiasco when 1.4 million dairy cattle were placed on the market in an extremely unorganized fashion. The cost to the beef industry was $1 billion dollars in lost revenue. Robb also said that there were intentions to market the dairy cattle in quick order, roughly one month.

I’d say this one is worth calling your senator to deflect the public expenditure in the stimulus plan. This proposal helps nothing but a handfull of dairy operators and would be terribly damaging to beef producers. 

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