Trend lines mark the progression of price points in a graph form. They are helpful both for reviewing history and for planning for the future. Two critically important trend lines are particularly relevant as we move towards year end. The first comes in several varieties although the direction is the same for all. This is a price trend line.
It doesn’t really matter whether you are selling calves, yearlings, or fed cattle, the price trend line is down. For the week of Aug. 14-18, the price trend line—that reached a high for fed cattle of $146 early this year—took a big spike down and all of the loss went straight to the bottom line.
The second critical trend line is the projected breakeven of cattle in inventory that will be marketed by year end. The breakevens for both fed and stocker cattle is moving higher with each week through year end. In the feedlots, many of the breakevens will be reaching the $120s soon. Yearling breakevens for cattle grazing summer pastures will be in the $140s and $150s.
For some, if not many, this year’s price decline is differentiated from last year with more operations having some hedge protection for price declines. As always, the coverage varies from operation to operation. Many of the hedged operators have suffered some hedge losses during the past few months. Some have already covered hedges, thinking the summer low has been reported. The sweet premiums of feedlot cash sales over futures is mostly gone and replaced now with more traditional basis levels.
The current view of the market prices expressed by the futures market may not be gloom and doom, but it certainly doesn’t forecast a return to the $120s anytime soon. In the feeder classes, spring feeder prices are forecast lower than this fall—an unusual perspective with little historic support. With lower replacement cattle prices forecast for next spring and a bumper calf crop, we might expect much lower calf prices this fall. This year’s replacement prices have maintained premiums over last year but with this year’s growing calf crop, that might change this fall.
A break below last fall’s prices for calves will have repercussions for breeders. The cow slaughter this year has stayed consistently 10 percent and more higher than last year. If calf prices continue downward, expect more cow culling this fall and a likely end to expansion of the nation’s cow herd. The growth has already slowed and will slow further or stop depending on the extent of a price decline this fall.
The market is searching for a sustainable price level allowing all sectors to make a living. This will likely require more slaughter capacity to fairly apportion operating margins among the various beef production sectors. It also will need a better functioning futures contract. The current contract is flawed and requires a contract with a transparent cash market to attract new speculative traders into the market. The contract must be cash settled for those traders to enter the market. Finally, consumer preferences must be delivered to the meat counter, matching price and quality points with production specifications. — AgCenter
