Feeder cattle on the move

Jul 26, 2013

The December corn contract broke below $5 last week, which seemed like a major support level. Some of the latest corn reports are suggesting we’ll have a good pollination season despite the late planting, and there appears to be confidence that we’ll have a record-setting corn crop this year. Lower feed prices are shoring up a very strong feeder cattle market now and into fall. Cattle feeders have been buying replacement feeder cattle like they have a new lease on life. They will have less expensive feed stuffs, but they are also bidding yearlings and calves back up to the level where black ink will be hard to find. For instance, an 800-pound steer with a sale price of $150 placed today, with feed costs winding down during the term, will still find the breakeven at the $129 level.

Feeder cattle markets have been very strong the past six weeks, gaining over $10/cwt. The August feeder cattle contract is still over $153 and the cash index has moved up to $145.86. The spread that existed two weeks ago of $14 has all but vanished, currently at $6.49; the October contract is over $158, showing that there may be some room for the feeder cattle markets to go higher.

A lot of feeder cattle have been sold over the past few weeks through the big video sales and special sales at the auction markets. Nationally, there were 447,200 feeder cattle traded the week ending July 19 and 499,900 head traded the week before, compared to 273,100 the same week last year.

Derrell Peel at Oklahoma State University pointed out that there was a relatively large placement rate of feeder cattle into feedlots the first half of the year which was sustained by a larger beginning feeder cattle supply on Jan. 1 and the likely diversion of some replacement heifers into feedlots. There are also indications that something between 100 thousand and 230 thousand head of replacement heifers that were intended to be bred may have entered the feedlots since Jan. 1. Then there are some 400 thousand fewer head of Mexican feeder cattle that have been imported so far this year. By the end of the year, the reduction is likely to be 700 thousand to 800 thousand head fewer imports of Mexican feeder cattle.

We know that the cow herd is smaller and fewer feeder cattle are inevitable; then you take out the Mexican feeders and the heifers that already went to the feedlot and there could be even greater demand for feeder cattle and calves this fall.

Andy Gottschalk at Hedersedge.com reported that with “the current strong market, heavier marketing numbers continue to develop, as many sellers cannot resist the price gains of the last six weeks. Drought conditions prevail in many grazing areas, which will continue to force feeders and calves to market. The year to year increase in feeders and calf supplies outside feed yard reported at the beginning of the second quarter is quickly being depleted. Second half feeder and calf prices should garner some additional benefit from declining supplies and cheaper feed grain prices. This should limit selling pressure on feeders and calves this fall. In addition break even’s on fed cattle this fall and winter will be substantially below last year’s level.”

The June 1 cattle on feed report was uneventful in that it met with market analysts’ expectations. But, cattle on feed were down 3.2 percent, placements were down 4.6 percent, and marketings were down 4.5 percent with one less marketing day which will make it about even with a year ago. Placement patterns were showing feeders wanted more large yearling cattle with the 800-pound category up 26.5 percent and the reduction in overall placements came from the under 700-pound category which was down 30 percent.

It appears that the summer market may have found its low last week. The boxed beef cutout found a low of $186 and then started to move higher throughout the week. Fed cattle were trading at $119 cash, which has been steady for the past few weeks. Packers came to buy cattle last Wednesday, which is early and indicating they need cattle and have contracts to fill. Typically, we don’t see the market low until the first week of August.

These feeder cattle markets are much improved since the beginning of summer and the near-certain prospects that we’ll have a good corn crop should keep markets strong. There could be some more room to advance the feeder cattle markets going into fall. It looks like some smooth sailing on these feeder and calf markets for awhile. — PETE CROW