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Tuesday, December 3, 2013

Cheap feed

by Pete Crow - Publisher

There is certainly a lot less pressure on feed stuffs this winter. With the EPA proposing to lower the volume of ethanol production last week, there should be even less pressure on the huge corn crop that was just produced, and harvest is mostly complete. Feeding costs for livestock producers certainly benefit the cattle business going forward.

This November’s Cattle on Feed report didn’t get anyone too excited. We’ve been in a sideways trading pattern for the past 4 to 5 weeks with live cattle averaging over $130 the entire month. The market picked up a little bit last week as buying interest faded on turkey week. Packers were buying for short Thanksgiving holiday processing schedule. Now that we have had the one day turkey binge out of the way, we should start to see the market advance again with predictable holiday Christmas demand for the middle meats. Market analysts are expecting to see live steers at $140 with anticipation of weather induced markets.

October placements of feeder cattle into feedlots were up 9.8 percent over a year ago. This sounds like a big jump after the past few months showing placements far below last year’s pace, but to put some perspective on it, October placements were the second lowest on record. And interestingly enough, cattle weighing between 700 lbs. to 799 lbs. were 17.2 percent higher than a year ago, while the heavy weight steers were up only 3.5 percent.

We have a good solid marketing story to tell with marketings at 1 percent over a year ago. According to Andy Gottschalk at Hedgers Edge, “The marketing rate was the third highest on record. Of the major cattle feeding states, Kansas and Nebraska posted the largest marketing gains, up 10 percent and 7 percent, respectively. Although marketings were very positive, carcass weight data bears close watching in the coming weeks.”

According to Gottschalk, “The limited premium in deferred fed cattle futures should discourage cattle feeders from over-feeding cattle in the coming months. This is in distinct contrast to the premium futures market structure that existed at this time last year. On Nov. 15 this year, February live cattle futures were at a $1.40 premium to December, versus the $3.77 premium last year. Also on Nov. 15 this year, April live cattle were $0.22 premium to February versus $3.98 last year. The price signal given by the futures this year contrasts sharply to that which prevailed last year.”

Feeder cattle trade should remain steady at these levels. The CME feeder index was at $165.10 last Wednesday and should remain in that $155-165 trading range for a while. Cattle feeders would be hard pressed to push them much higher with current breakeven in the mid $130s. Even though feeders are finally earning a few bucks, it’s still a high volume/low margin business that requires a lot of capital to operate. Forecasts of increasing interest rates will place even more pressure on this sector.

Gottschalk also notes the lower fuel prices consumers are paying was like getting a tax break and has added billions of dollars to their discretionary spending. However, it is likely consumers’ concern over “Obamacare” and its cost may pose a much more serious threat to consumer discretionary spending in 2014.

The added cost of “Obamacare” to consumers is likely the greatest threat to domestic beef demand in 2014.

This beef demand is holding up rather well. The cutout has become comfortable at the $200 level. Retailers are getting used to the higher numbers and are still able to feature beef items. They will be tested over the Christmas season when demand for the middle meats gets very strong. We have been told that $130 live cattle can be supported by a cutout of around $205.

All the domestic beef demand surveys have shown good demand and consumers’ willingness to pay a bit more for beef. Retail featuring of beef remains good and our beef export business continues to surprise us, even though USDA is forecasting a 6 percent decline in beef exports for 2014. Beef exports to date are higher than they were forecast last year.

I remember when we got our first exposure to $5-6 corn. I was told by one of the nation’s largest feeders that expensive feed makes expensive cattle. He was right, but now I wonder if cheap feed will make cheap cattle. At this point, I wouldn’t think so with the lowest cow inventory in a half century. I would say that cheap feed could make for cheap pork and poultry because their reproduction cycles are so efficient. But remember you cattle folks are only allowed to have turkey one day a year. Hope you had a happy Thanksgiving! — PETE CROW

 
 


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