Beef glut now, light and tight later

Jun 3, 2011
by DTN

“We had record high prices this spring, and they are still strong historically, even though they’re off their peaks.”

With May fed cattle supplies hitting highs not seen since 2007, and beef in storage marking a 10-year peak, there are some serious questions in the cattle industry concerning where prices are headed going into the fall. The general consensus on selling feeder cattle: Wait, if you can.

“There are a lot of angles to this market, and there are more cattle being placed in feed yards for a lot of reasons, including a lack of forage and other related weather pressures,” says Glynn Tonsor, agricultural economist with Kansas State University.

Cow/calf producers or stockers with access to forages have an enhanced advantage this year. “If you can feed that forage and postpone selling, the prospects for profitable weight gain increase as we go into the third and forth quarters,” says the economist.

The May USDA-National Agricultural Statistics Service Cattle on Feed report showed animals on feed at some 11.2 million, up 7 percent from year-ago numbers. A glut of animals rolled in during April, nearly 10 percent more than the previous year. A large number of these animals came out of Mexico, where drought conditions are forcing feeder cattle to the market earlier than expected.

Mexican feeder cattle entered the U.S. at levels about 26 percent higher than the same period a year ago.

Tonsor says the USDA report caught many in the industry by surprise. “In this report, we saw placement numbers higher than those with even the most aggressive expectations would have predicted,” he says. “Part of that was weather related, and it’s important to note that a fair number of those placements were very lightweight, below 6-weights. Those won’t hit the market till October and November.”

This means we’re deep into the well on feeder cattle supplies, and that will likely lead to a measurable price bump as we near the end of the year. “Given feedlot capacity, feeder cattle supplies will get tight later in the year, no question. We’ve been pulling animals into the feed yards faster than expected, and there are only so many live animals to be placed. So this may be a positive for those who haven’t already sold calves. Feedlots will increasingly compete for those available supplies through the rest of 2011.”

This glut of fed cattle doesn’t necessarily mean the bottom is going to fall out of prices. Tonsor points out there is an “overcapacity” in both the feed yard and processor sectors of the industry. Because there is more bunk capacity than animals, many operators tend to bid more aggressively than traditional, breakeven calculations might indicate to fill that bunk space.

“The simple fact is that even with these large supplies, there are not enough animals to fill existing capacity consistently. So in many cases, we observe feedlot operators bidding beyond the breakeven point and absorbing a small loss rather than a large loss that may come with empty bunk space,” he explains.

Of all the USDA numbers released in the report, the fact that beef in storage has hit its highest point for the month in at least 10 years may be one of the most negative pieces of news for the industry as a whole, says Tonsor. Beef stacking up in cold storage means fewer consumers are buying beef now, and that is reducing the value of all cattle. More narrowly, he notes, while domestic demand strengthened yearover-year in quarters three and four of 2010, as well as the first quarter of 2011, the increasing cold storage stocks are raising concerns about persistence of these improvements.

Kevin Good, senior market analyst with CattleFax, agrees with Tonsor that some cattlemen will have strong prices to look forward to this fall.

“We had record high prices this spring, and they are still strong historically, even though they’re off their peaks. So the overall picture is bright from a price standpoint,” he says.

“Seasonal factors are taking place, and we have a bigger number of cattle on feed due to bigger placements as a result of drought and higher prices. We’ve just moved more cattle to town early. That means supplies are smaller outside of the feed yards, and there is a smaller calf crop coming. Tighter and lighter placements is what we have to look forward to as we go into the fourth quarter.”

Lastly, Good says he is still concerned about corn supplies and the volatility of that market.

“We’re losing acres due to a combination of floods and late planting,” he says. “The prospects of losing acres makes it tougher to get that big crop we need for new crop to get back to a reasonable price. We need a record crop year after year to hold our own, and that may be a tough thing to accomplish this year.” — DTN