Sep 9, 2011
Higher or lower

Labor Day weekend signals the start of the West Coast bull sale season. The first round of bull sales have been great for seedstock breeders. The first few reports show that breeding bulls are averaging $4,000- $5,000. These bull prices are a bit higher than a year ago and there is clearly good demand. Range and pasture conditions on the West Coast are about as good as they get. There has also been some speculation that breeding bulls may be in short supply in that area.

Labor Day also signals the end of the summer and is the last big back yard grilling weekend. Reports suggest that beef sales over the holiday weekend were lighter than many market analysts had hoped. However, post Labor Day cattle markets appear to be stronger. Futures markets had a nice rally early in the week trading live cattle in the $117 range, and we’re still waiting for cash trade to develop for the week, which should be a few dollars higher.

Feeder cattle prices have remained strong, but as the fall market situation develops, it seems like a sure bet that feeder cattle will be a bit softer compared to the summer rallies. It’s ironic that feeder cattle markets have retained their strength with feed costs going higher. The typical relationship of higher corn prices equaling lower feeder cattle prices has gone out the window, which seems to have market analysts perplexed.

The idea that there is an ever smaller supply of feeder cattle appears to keep the bullish tone on the feeder cattle market, especially when you consider cattle feeders have lost any positive margin for the foreseeable future. Current feeding losses and ample supplies of feeder cattle already in feedlots may keep a lid on any expansion in the feeder cattle markets this fall.

The Livestock Marketing Information Center (LMIC) reports that in the first four months of this year, cattle feeders recorded record profits of $120 to $170 per head, then quickly turned negative in May. Feeding breakevens for cattle due this fall are ranging between $128 to $130 per cwt. LMIC suggests that feedlot losses going forward will average over $100 per head for the balance of this year.

Those large feeding losses will spill over into feeder cattle prices, which they expect to be lower for the balance of the year as well. However, despite high feedstuff prices, tight feeder cattle supplies, and year-over-year increases in fed cattle prices, they expect to see feeder cattle prices above year ago levels.

Feed costs for feedlots are more uncertain than ever and winter wheat grazing is starting to be a concern, which could weigh in on feeder cattle markets. Corn remains the most important feedstuff for cattle feeders and the current corn crop will not meet expectations.

Corn crop yield forecasts are expected to drift lower and several market analysts have dropped their yield estimates to 148 bushels an acre, which would produce a 12.45 billion bushel crop, a far cry from early summer estimates of 163 bushels. The cash corn markets are already touching $8 in some areas.

The movement of feeder cattle will certainly change market dynamics this coming year. We had larger than expected placements in feedlots during July and many market analysts are expecting August placements to be as large, if not larger.

Dry conditions have harmed feeder cattle demand by delaying or limiting prospects for winter wheat pasture. That alone would normally put pressure on feeder prices except for the fact that the same drought has caused significant early marketing, therefore tightening the supply of calves this fall, according to Derrell Peel, Oklahoma State University Extension livestock specialist. He also thinks that there will be very little price pressure this fall.

In addition, corn prices are keeping feed ration costs very close to the level where feeder cattle and fed cattle have to trade at even money for cattle feeders to break even. It’s a stretch to think that we will be trading fed cattle in the $130 range for cattle feeders to break even.

There have been a few hedging opportunities this summer near that level, but I have a hard time thinking that the beef cutout would support $130 fed cattle. It would appear that we will again test consumer resolve on higher beef prices. — PETE CROW