Kay's Korner

Apr 4, 2014

The red-hot market

What an incredible time to have young cattle to sell. As I write this, calves weighing 600 to 650 pounds are selling for $197 to $206 per cwt at Oklahoma City. Not far behind them are 650 to 700 pounders at $188-189, 700 to 750 pounders at $178- 187.50, 750 to 800 pounders at $174.50-180 and even 995 pounders at $156.50.

Who could have imagined a year ago that a calf could fetch more than $200 per cwt? Bear in mind that calf prices are over their peak, as grass fever (buying calves for grazing programs) has come to an end. Even more startling are the prices being paid for heavier cattle. Buyers of calves have a possibility of making money through cheap gains. But I can’t imagine how anyone can turn a profit on the heaviest cattle unless the live cattle market defies gravity this summer.

Cattle buyers seem to have forgotten the old adage that the money runs out before the cattle. They are behaving as though they need to own cattle at any price. They are no doubt mindful that the supply of cattle outside feedlots on March 1 was one million head below last year. But their pens aren’t empty. The number of cattle on feed on April 1 was expected to be above a year ago, after being down only 0.5 percent on last year on March 1. This was the result of larger-year-onyear placements in December, January and February, and very light placements during these months a year ago.

Cattle feeders appear equally certain to give back the money they have made this year, in part because of that placement pattern. The pattern is likely to mean a significant increase in fed steer and heifer slaughter in the second quarter from the first and a likely 1 percent increase from the second quarter last year.

Cash live cattle prices so far this year have at times had a different trajectory to boxed (wholesale) beef prices. Prices came down far less in February when boxed beef prices collapsed. But the two prices will be more entwined as the industry produces much more beef this quarter. Fed steer and heifer slaughter so far this year is down 5 percent on last year. This and much-reduced cow slaughter in the first quarter meant a record decline in commercial beef production from the fourth quarter of 2013 to the first quarter.

This allowed packers to raise the price of beef cuts, trim and grinds to record levels. The comprehensive cutout the week before last was a record $238.21 per cwt. That’s why packers continued to pay record high prices on the cash market for live cattle. But steer and heifer slaughter is expected to be even with last year by late April and up 2-3 percent by June. The increase in beef production from the first to the second quarter might be almost 600 million pounds. This would be the thirdlargest increase between the two quarters. The increase last year was only 344 million pounds.

In other words, cattle feeders will have more cattle to sell and packers will have more beef to sell. This will put pressure on live cattle prices and that’s why the June and August live cattle futures contracts have been running at a deep discount to the current cash market. These discounts have been factoring in a normal seasonal decline in cash live cattle prices from a winter/ spring high to a summer low.

The live cattle market has been entirely supply-driven so far this year. It is now about to become much more demand-driven. How low live cattle prices go will depend on how beef sells at the wholesale and retail levels as the grilling season approaches and then begins. Right now, analysts believe cash live cattle price will decline slower in the second quarter than boxed beef prices. But fed beef packers struggled with operating losses in the first quarter and will be determined to make up for their losses in the second quarter. They will reduce production if necessary to keep boxed beef prices up and put pressure on live cattle prices.

Conversely, packers will raise production if they are making money. This though will depend on consumers’ willingness to keep paying higher prices for beef in the grocery store. They have certainly done this so far this year. USDA’s February All Beef retail price averaged $5.28 per pound, up 7.5 percent on February last year.

Another USDA price measurement, its Consumer Price Index, put overall beef and veal prices in February up 5.4 percent. That’s for beef and veal sold in all outlets. All in the industry, from cow/ calf producers to packers, can only hope that Americans fire up their grills as usual this spring, the earlier the better. They must also hope that consumers won’t mind paying a lot more for a delicious steak to put on those grills. — Steve Kay

(Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765-1725. Kay’s Korner appears exclusively in WLJ.)