Packers are perplexed on how to break this market. Two months ago, the futures market was pessimistic about the August fed cattle market, thinking the seasonal low would be in the low $160s range. It’s the end of July and we are still trading cash cattle in the $180s in the North and $175 in the southern Plains. There is still a wide disparity between southern and northern fed cattle markets. Packers have been slow to buy on the cash market; cutouts are falling, and they are losing money, so they will cut slaughter to support the beef cutout value.
The northern and southern fed cattle markets are distinctly different. Southern feeders feed the southern cross kind of cattle, as well as Mexican cattle and the beef-on-dairy cattle, and have fewer cattle grade Choice and Prime. Southern feeders also love their formula arrangements.
Last week, only 500 head traded on the cash markets in Texas, Oklahoma and New Mexico, which makes one wonder about their base price for formula cattle. Establishing a base price is becoming a problem once again. Remember two years ago when southern Plains cattle feeders were trying—perhaps not very hard—to trade more cattle on the negotiated cash markets to establish a more robust base price?
The Ag Center’s Cattle Report opined recently about the base price for formula cattle: “Unfortunately, for many sellers, these scarce reports set the market for hundreds of thousands of cattle moving into the nation’s beef plants for next week. The question of where the market was made is easy to answer—in the opaque world of private non-transparent trades that occur every day. The reported transactions are a small fraction of cattle purchased as packers rely on ‘over the tops,’ negotiated base prices with an agreed upon grid, and other non-discoverable prices, all combined to put together a kill.
“Many cash sellers are now reaping the rewards of private negotiations as they watch formula sellers take a back seat to aggressive buying in a time of short supplies. Cash sellers have long complained about bearing the burden of price negotiation while witnessing formula sellers take home premium prices. Grid selling is the most logical and natural outcome of the price signals necessary to form the genetic base for characteristics desired by the consumer, but the establishment of the base is key.
“For formula and committed sellers, the next chapter in marketing is developing. The short supply of fed supplies has changed the landscape and having a kill slot is not the driver today it has been in the past. Formula sellers will begin to disaffect opting for negotiating a base price rather than accepting the unreliable base provided by the few cattle reported in the cash markets.”
Dry weather in the Corn Belt has created huge volatility in the corn markets; July has been tough on farmers. Between June and July, the September corn futures have swung up to $6.20, down to $4.75, then back to $5.45. Yields will be lower unless they get rain soon. The Drought Monitor has shifted from the West to the Midwest—most of the West is in good shape.
Feeder cattle futures have been moving with the corn markets but are still on a bullish trajectory. One would think feeder cattle are trading near the top of the trading spectrum. I still can’t believe that a set of 950-lb. steers sold for $2.59 in the recent video sales—that’s $2,460 per head. What is the feedlot breakeven on those cattle? It must be over $200/cwt when they’re ready to harvest. December live cattle contracts are only showing us $187/cwt.
This market cycle is much different than it was in 2014. We have the smallest cow herd in 50 years and this next midyear inventory is expected to be down another 2.3% for all cattle and another 1.4% in 2024. 2025 is projected to be down another tenth of one percent. Then herd building will begin in 2026.
There are lots of heifers on feed right now. Heifer slaughter was at a record level last year and is down 1% as of July 1 this year. When herd building started in 2016, heifer slaughter was at an all-time low. There have been more heifers than normal in the weekly slaughter mix.
Enjoy this market, who knows how high it might go. However, keep praying for midwestern rains, they need it. — PETE CROW
