Expensive feed = expensive cattle

Aug 24, 2012

Labor Day weekend looks like it’s going to treat the beef industry pretty well this year. Boxed beef prices have advanced well since July when we dropped down in the $170 range and last week the choice cutout was trading at $193.73, a 9 percent gain since July. It’s a little hard to figure if the market will stay at that level after Labor Day. What we really need is to get the cutout values over $200 so packers can pay cattle feeders what they need to make a few bucks.

The latest Cattle on Feed report showed that cattle placed into feedlots was 10 percent lower than a year ago, but it’s a little misleading since there were a lot of cattle placed last year because of the drought in the southern plains. With the new expanded drought, one might think that placements would be even higher than a year ago, but they’re not. Current drought conditions are wide spread this year affecting more cattle operations.

With the dry weather, one might expect cattle placements weighing less than 600 lbs. to be higher than normal. But that category of cattle placed into feedlots was 20 percent lower than last year. However, last year was not normal, and year ago placements under 600 lbs. were 22 percent higher than the average of 2008-10. Cattle placed that were 800 lbs. or more were the largest on record for July and usually when they go in to the lot heavy they come out heavy. We’ll see if that holds true with $8 corn. Placements in Oklahoma and Texas were down 21 percent and 25 percent respectively. Grazing conditions in some parts of Texas have improved dramatically from last year and Oklahoma was in a little better shape.

We have had lower placements the last four or five months. The shortage of cattle is really starting to show up and the total number of cattle on feed is more manageable. Also it appears that a lot of the yearling cattle are 100 lbs. to 150 lbs. lighter this year.

Steve Meyer from the CME said, “We expect cattle placements to remain lower than one year ago for the remainder of 2012. That is not saying a lot since placements last year were so large but tighter feeder cattle supplies and record-high feed prices will both discourage any growth in feedlot numbers. We still expect feedlot inventories to fall below year-ago levels in September and for beef cutout values and cattle prices to move higher this fall.”

But the number of cattle in feedlots is about dead even with last year. Fed cattle were trading at $120 last week and the deferred futures markets are providing cattle feeders a lot of incentive to carry cattle through September. October live cattle are at $124.75 at the CME and December is standing at $128.12 and feeders can lock in cattle for $135.60 now.

Andy Gottschalk at Hedgersedge.com is constantly concerned that feeders will not sell cattle, botching up the orderly movement of market ready cattle and ruining the late fall market with an oversupply of market ready cattle. He is also concerned about carcass weights getting too high, which cattle feeders are prone to do when they pay too much for feeder cattle. He says every pound of additional carcass weight is the equivalent to 1000 head of cattle not being slaughtered.

He also says that a deteriorating economic environment here and abroad can offset the positive impact of declining beef supplies and that if demand does not deteriorate then he expects the live cattle market to average $128.50 for the year, but retail prices will have to average $4.90 a pound, up from $4.66.

He also said, “There are storm clouds on the horizon. That said, a change in leadership this fall could begin to unleash the trillions of consumer and corporate dollars being withheld from investment. Today’s uncertainty is the main obstacle limiting huge investment potential, spurring economic growth and recovery. Both elements are necessary to advance consumer confidence and bolster spending.”

In other words, Obama is the problem, not the solution, to our stagnate economy.

I would have to say a bunch of rain would help too. It’s late August and there isn’t a bunch of winter feed available. We have had several reports from ranchers that their hay crops have yielded only 30 percent of their normal production. If it’s a tough winter, it could be problematic for many cattle operations. It would be a good idea to secure your feedstuffs early this year. PETE CROW