Seasonal patterns

Sep 6, 2013

Higher, higher and higher is the mantra of the feeder cattle market, which has been on a rally of extraordinary strength. It’s just amazing that this market has been on a three month roll and nothing is holding it back. The simple fact that we have the smallest breeding herd in history is making its mark, and cow/calf operators are reaping all the benefits. The most current feeder cattle index price was $156.01 last Tuesday.

Even though prices are high, consumers appear to be buying beef and we have strong export markets. However, it appears that it wouldn’t take much to destroy beef demand. Both pork and poultry producers are ramping up production and will put some downward pressure on beef prices. Low supplies are good for short term prices but not good for long-term demand.

The saving grace for the livestock industry in general is we will have lower feedstuff costs very soon. Corn prices are somewhat volatile right now because each weather movement affects this hyper-sensitive corn market. After a week of hot, dry weather in the Corn Belt, the corn futures are settling down and moving back into the $4.50 range on December corn.

Last week USDA rated the corn crop at 56 percent in good or excellent condition. The corn rating is right on the 10 year average for the beginning of September. A year ago, 52 percent of the corn was rated as poor or very poor. This year will be dramatically different than the last year for corn users.

However, the late planting has had its effect with only 4 percent of the crop rated as mature. Steve Meyer, author of the CME Daily Livestock Report, said, “Bottom line: these crops are very immature as of 1 September. That, of course, brings frost into play but NOAA’s eight- to 14-day temperature outlook says the probabilities are high for normal temperatures from the Missouri River eastward and above-normal temperatures for the far western part of the Corn Belt.”

Private yield surveys are starting to be published and most recently FCStone has estimated yield to be 156.4 bpa, and Allendale Inc. announced their survey pegs yield at 153.4 bpa while USDA is at 154.4 bpa. The range of estimates is from 151 bpa to 159 bpa. The two greatest threats for the corn crop are total acres harvestable and frost. Meyer said, “As for frost, we’ve kicked that one around pretty well already and we can’t find any short or intermediate term temperature outlooks that say frost in imminent.”

They expect to see hog carcass weights go higher because of new crop corn and cooler feeding conditions.

But, according to Meyer, “The cattle situation is quite different primarily due to the Zilmax situation and the fact that LAST YEAR saw the big jump in weights. Even lower feed prices have not kept weights growing so far in 2012 relative to the beta-agonist-induced increases of last year. We still do not expect the suspension of Zilmax sales to have a significant impact on weights since feeders can still use Optaflexx, a product that takes end weights to within 6-8 pounds of those usually achieved with Zilmax. The cattle numbers situation will be a factor as well since the inventory of cattle on feed for 120 days or more as of August 1 was 15 percent lower than one year ago. Those would be cattle due to come to market, generally, in August and September so yards may have to dig deeply to fill packer needs over the next 30 days, limiting the upward potential for average carcass weights.”

Andy Gottschalk at Hedgers Edge reports that the premium in the October futures market will continue to draw cattle in order to capitalize on the premium market structure, despite the placement of more heavy weight feeders noted in the recent cattle on feed report. The seasonal pattern of fourth quarter prices averaging above third quarter average prices is expected to continue this year. The direction of prices is seasonally positive from the third to fourth quarter. Steer and heifer carcass weights are now below a year ago levels, evidence of an industry that is becoming more current. A sharp decline again in August placements will only add to the positive fed cattle supply outlook for the first quarter of 2014.

It is also worth noting that hide and offal values have been trading at record levels this summer with last week recording a drop credit of $14.04 which is adding over $200 per head on fed cattle. The drop credit peaked at $14.70 last July. Most of the value is coming from tongue exports to Japan and hides which there fewer are of and also good demand for leather household good and upholstery in the auto industry. — PETE CROW