It’s interesting what can happen when you step away from watching the cattle markets for a few days. Two weeks ago, I was out at bull sales, not watching things as closely as I usually do. I came back to the office and was going through my market info routine. Bang. The Choice beef cutout was at $118; just a few days before it was $210. Fed cattle were trading just below $120 and bang, they’re up to $129. Perhaps there was some winter weather that created the effects of a storm market. But, so far winter has been mild, in terms of moisture. It has been plenty cold.
So here we are. Fed cattle trade came early last week at $126 in the South and up to $130 in the North. Packers are struggling to take total slaughter over 600,000 head a week, but then again, it’s winter. It’s a seasonal thing, and beef demand is at its low point. March is the worst demand month of the year.
Packers have become a bit spoiled over the past two years, earning perhaps the largest profits in history. Last fall we were processing more cattle and selling the beef for more money. Now packers are forced to play the production game to keep a margin. Currently they are making about $18 per head. But they only processed 575,000 head.
The big question everyone is asking: “Is the winter market top in at $130?” You talk with the market analysts and you get a mixed bag of answers. Some are saying the next resistance level is $137, which would be remarkable in my book. But over the past five years I’ve been surprised many times about the volatility in the cattle and beef markets.
The last Cattle on Feed report had a bearish tone to it. Cattle on feed was 8 percent higher, just a couple points higher than expected. Marketings were 6.1 percent higher, perhaps a little better than expected but placements were 7.9 percent higher, roughly double what analysts expected.
There is a lot of talk that we are developing a large wall of cattle going into the summer months. This is a typical trend, perhaps a bit higher than usual. This past fall, we and the analysts were warning cattle feeders about the same trend going into January and February. In my experience, every time a wall of cattle is projected using Cattle on Feed numbers as the benchmark, this industry always seems to move through said period without too much damage. A well-advertised wall of cattle five months from now always seems to dissipate.
However, it may be different this time. Our friends Andy Gottschalk and Bob Wilson at HedgersEdge have been keeping track of front-end supplies of finished cattle for quite some time. They said in their post-Cattle on Feed report: “Front-end supplies continue to trend consistent with prior estimates. Wishful thinking will not eliminate this trend; only accelerated slaughter rates can reduce the degree of the buildup. By April 1, this category of cattle projects to be 31 percent above year-ago levels. Be reminded that a year ago these numbers (and carcass weights) were abnormally low. A better comparison for this category is to use the previous five-year average, which shows it to be down 1 percent. However, by May 1 this category of fed cattle projects to be 39 percent above the prior year and 8 percent above the previous five-year average.
“This accelerated build-up will continue into the summer,” says the HedgersEdge team. “Given the various limitations on slaughter capacity, it will be a challenge to meet projected weekly slaughter levels. As such, the fed cattle supply should become increasingly front-end loaded. Carcass weight data is the arbitrator of truth. Steer and heifer carcass weights are currently 10 lbs. and 9 lbs. above year-ago levels, respectively.
“By the time the spring low in carcass weights is achieved, these are likely to exceed year-ago levels by 20 pounds or more, adding approximately 3 percent to weekly beef production,” they conclude. “While we remain very optimistic regarding beef and meat demand (which serve as a buffer to lower prices going forward.) Demand has its limits amidst the large increase in meat supplies.”
April typically signals the start of grilling season, which is also dependent on weather. Demand will pick up. But the million-dollar question is how much it will pick up to clear the heavy projected supplies? The typical break in the fed market from the winter high to the summer low is around 15 percent. If we have already achieved our winter high, that would project a summer low of around $109. We’re in a normal seasonal trend in the cattle markets and we’ve dealt with greater numbers than this before.
The good news is that these heavy placements have reduced the supply of feeder cattle in the country and it is expected to keep the calf and yearling markets stronger than anticipated. Hedgers Edge has forecast 7-800 lbs. steers to average $140.00 and 500 lbs. calves to be $162.50. — Pete Crow