The live cattle market has performed better than expected so far this summer. But how it performs this month and next might determine whether cattle feeders make money or not this year. Beef demand at home and abroad will remain a key factor. On the supply side, carcass weights and weekly steer and heifer slaughter will provide key evidence as to whether the industry is marketing cattle on a timely basis or not.
Cattle feeding profits in 2018 have ranged from more than $100 per head on the plus side in January and February to projected losses of more than $100 per head in July, says Shawn Walter of Professional Cattle Consultants. So, 2018 may go down in the books as a wash. Breakevens will drop from now through the fall and likely level off around $114 per cwt for the fourth quarter. Using the futures as an estimate for live cattle prices, the remainder of the year projects losses that will offset the $100 per head first quarter average profits, he says.
The July losses came despite the month seeing two weeks of stronger than expected prices. The conventional wisdom was that cash prices would weaken because of the impact of the dog days of summer on beef sales and the build-up in market-ready cattle supplies. Yet the first week of July saw a nearly $6-per-cwt surge in prices. They lost $2 per cwt the next week but then recovered by the same amount the third week. The final week of the month though saw a $1 decline.
How cattle feeders wrestled leverage away from beef processors in those two weeks appeared counter-intuitive to what was expected to occur. Cattle feeders got no help from the futures market, as the August live cattle contract traded mostly from $105-109 per cwt during the month. But cattle feeders dug in for higher money because of mounting feeding losses and packers relented, knowing they were still making well over $100 per head.
Cattle feeders’ July victories however might have come at a cost because they did not sell enough cattle to reduce the front-end cattle supply. Some market analysts had warned for months that market-ready supplies would peak at the start of August at near-record levels. The Aug. 1 front-end supply (cattle on feed 150 days or more) was second only to the record total in 2015, says Andrew Gottschalk, HedgersEdge.com. He estimated the total at 2.135 million head, up a whopping 49 percent from last year.
Gottschalk also forecasts that the front-end supply will remain much larger than last year into next January. So marketing rates must accelerate, he says. He also warns about the “invisible” supply of cattle in the Corn Belt that are not included in USDA’s monthly Cattle on Feed (COF) reports. The latest report confirmed that the market will be well supplied into the New Year. The July 1 COF total of 11.282 million head was 461,000 head or 4.3 percent larger than a year ago and the highest July 1 inventory since the data series began in 1996.
Other analysts though say the peak in supplies has been reached. Whether this is correct or not might be hard to tell if cattle feeders defer marketings to take advantage of cheap feed costs and the premium in the deferred live cattle futures. In other words, the peak in supplies might get pushed back into later this month or even into September.
That’s why carcass weights and weekly slaughter levels as they apply to steers and heifers will be so critical. For the year to July 14, steer weights averaged 870 pounds in the 28 weeks, versus 864 pounds for the first 28 weeks last year. Heifer weights averaged 809 pounds versus 801 pounds last year. These are both sizeable year-on-year increases and suggest that this year’s average weights will be quite a bit higher.
Steer and heifer slaughter for the 28 weeks totaled 13.713 million head or 490,000 head per week, versus 13.395 million or 478,000 head per week last year. Steer and heifer slaughter in July never got above 520,000 head per week and was only 505,000 head one week. This level was far too low for the industry to market cattle on a timely basis going forward, say analysts.
The bottom line is: Feedlots will have to be much more aggressive in their marketings the next two months to keep carcass weights in check and avoid new price lows for the year in September or possibly later. It’s worth remembering that last year’s weekly low came at the start of September after a nearly $15 per cwt decline in live prices from the third week of July. — Steve Kay
