Inventory picture points to strong prices ahead

Markets
Jul 30, 2010
by WLJ

Fed cattle trade last week was underway in the northern Plains and Corn Belt at prices generally $2-3 lower than the prior week at $93 live and $146-149 dressed. Trade in the southern tier was expected at $93-94 live, $1-2 lower than the prior week, as feedlot managers worked to take advantage of the positive basis levels available in the market last week.

Composite carcass values last week were mostly steady through the week, with Choice trading at $153.78 at midday last Thursday, down 92 cents from the prior day’s trade. Select was off 43 cents at $145.91 during morning trade. Packers have yet to show signs of reducing production levels, with the industry predicting a 666,000-head production week last week, steady with the prior week’s harvest. However, packers may begin to cut production soon in an effort to protect margins if they aren’t able to advance the cutout. Signs of weakness in the consumer sector are once again beginning to show signs of spilling over into beef markets and last week, beef exports also showed some signs of slowing as net sales fell 23 percent from the previous week, hitting 12,800 metric tons.

Through midsummer, beef prices have held up well, translating into good fed cattle prices and a willingness to pay good money for replacement feeder cattle. Much of the support in the market has been due to the extremely current state of feedlot marketings through the summer. Cattle feeders have worked to market inventory and reduced placements and performance well into spring has added to the market strength. Whether those trends will continue into fall remains to be seen, but last week’s cattle on feed report showed that there may be a backlog of cattle to process going into fall and winter marketing periods as feedlots have continued to ramp-up their placements of feeder cattle. The cattle on feed report, released by USDA on July 23, showed that cattle on feed numbers were up 3 percent from year-ago levels. Placements have also shown steady increases over the past several months. During June, placements of cattle climbed 17 percent above June 2009 levels to hit 1.63 million head. Marketings for the month, though, were only slightly higher than year-earlier levels, totaling 2 million head.

Despite the increase in placements and overall cattle on feed numbers reported by USDA, price impacts are expected to be limited as a result of the current state of feedlots, with some reports of "green" cattle being pulled forward this summer and the fact that overall cattle numbers both in and out of feedlots continue to decline, leading to an overall decline in the number of cattle available. In addition to the cattle on feed report, USDA released the semi-annual cattle inventory report on the same date. Overall U.S. cattle inventory numbers were reportedly down 1 percent from a year earlier, totaling 100.8 million head. A drop in beef cow numbers was expected by the industry, but the sharpness of the decline was steeper than some analysts had predicted. Beef cow numbers dropped 2 percent from July 2009 to total 31.7 million head, a decline of 600,000 head.. As a result, this year’s calf crop is also down, with USDA reporting a 1 percent decline from 2009. Total calf crop numbers were reported at 35.4 million head. Calves born during the first half of 2010 tallied just 25.7 million head, a drop of 1 percent.

The near-term implications are very positive for the beef industry, with the decline in overall numbers expected to lead to stronger prices across the board, particularly as domestic and international consumers begin to increase their spending on discretionary purchases. However, there are also concerns that if beef herd numbers do not begin to recover, it will lead to excess capacity, particularly in the feedlot and packing sectors, which will need to be absorbed, leading to a cyclical decline in demand.

There are many efforts in the industry to address the decline in the U.S. beef herd, however, there remain a good number of questions about why the decline is occurring in spite of the upturn in prices across nearly all sectors over the past year. In previous cattle cycles, higher prices tended to spur increased production. This time around, the increase in prices hasn’t spurred corresponding increases in herd growth. Last week, Chicago Mercantile Exchange analyst Steve Meyer pointed out one plausible answer for the continued decline in cowherd numbers, citing a suggestion by University of Missouri Professor Ron Plain, who pointed out that the U.S. beef industry continues to be heavily influenced by nearly 600,000 small herds, owned by part-time ranchers. This group controls approximately 30 percent of all U.S. beef cows, Plain pointed out.

"Many of these herds are, no doubt, only marginally profitable. Some probably require subsidization from off-farm income," said Meyer. "With money tight due to the recession, ‘Sell the cows,’ may be the best way to generate some cash and/or stop the subsidies. High cow prices would trump low costs and plentiful grass and there are enough cows in small herds—roughly 10 million—to push slaughter higher for a good while."

Meyer admitted that there may be other reasons for the continuing decline in beef cow numbers, but said that Plain’s idea was definitely a plausible explanation for the continued drop, which has taken the U.S. herd size back to levels not seen since the 1960s.

Feeder cattle

The combination of cattle on feed and cattle inventory reports last week showed that this fall’s feeder cattle market could be a great one. The early summer video auctions have turned in very strong results, with prices good across the board for all classes of cattle. That trend is likely to continue for at least the next couple of years, as long as consumers don’t shy farther away from beef purchases as a result of the broader economy.

The cattle inventory report showed that replacement feeder cattle availability this fall should be tight. The number of steers weighing 500 lbs. and more was reported by USDA at 14.3 million head as of July 1, down 1 percent from last year. Likewise the number of calves under 500 lbs. was reported at 27.5 million head, also down 1 percent from a year earlier. As a result, buyers could find availability this fall to be short, serving to limit the traditional fall decline in feeder cattle prices as the runs increase at auction markets.

Last week, there were some increases reported at auction markets as some early-weaned calves begin to make their way to auction markets, particularly in the southern Plains where grass supplies are beginning to diminish.

In Oklahoma City, OK, last week, feeder steers and heifers sold steady to $1 higher while steer calves were called steady with the previous week. Heifer calves were steady to $3 higher, with good demand noted for all classes of cattle. Pastures in the area are still in good shape and although it is still hot in the southern Plains, humidity levels have started to decrease, lowering the stress levels for cattle and calves, adding to buyer demand at the market.

Meanwhile in Joplin, MO, numbers were also slightly higher than in recent weeks. Steer and heifer calves and yearlings were called $1-3 higher with moderate to good demand noted at the sale, with buyers selective for type and kind, with long-haired or fleshy cattle being discounted.

In Kansas, there have been reports that the hot, dry conditions have depleted pastures in many areas, sending cattle to market. In Salina, KS, last week, calves and light yearlings under 750 lbs. sold steady to $3 higher than the prior week while heavier yearlings weighing over 750 lbs. traded steady to $1 lower. Market reports noted that there are heavy supplies of big yearlings moving off double-stock pastures in the Kansas Flint Hills, with several large consignments of green yearlings off grass and a couple reputation strings of home-raised calves on offer at the sale.

Farther west in Prescott, AZ, steer and heifer calves sold sharply higher last week, with increases of $4-8 noted, with a similar advance reported on yearling offerings. In Cottonwood, CA, lightweight calves under 600 lbs. were called $2-4 higher while those offerings over 600 lbs. were reportedly steady to $3 lower than the prior week’s sale. — WLJ

{rating_box}