Seems like a typical January when the first couple weeks the market gets good again and then we start into the cool zone. After the last Cattle on Feed report, one would think the market would get cold real fast. Futures traders seemed to take the news that way with 8 percent more cattle on feed Dec. 1 than a year ago. That seems like a pretty big spike, but last November’s placements were over 250,000 head lower than this year, which set up a nice spring rally in the fed cattle markets last year. Also, 20 percent of November’s placements were under 700 pounds, which suggests that a lot of heifers were placed that may have otherwise been kept as replacement heifers.
That doesn’t imply, however, that we don’t have a lot of cattle and beef coming down the supply line. We all know that this has been building for quite some time. In some ways, it’s remarkable that the industry worked through the cattle supplies so well this past summer and fall, at least compared to the year earlier. It is a great example that remaining current on fed marketings, being disciplined, and patience does help maintain an orderly market. But then Mother Nature can come along and mess that all up, such as a dry summer in the North Central states, and a suspicious snowpack in the Intermountain West.
If you stop and think about it, consumers are spending as much—if not more—of their incomes on beef than ever before. Retail meat prices are higher than they were a year ago. Everything that is earned in the cattle and beef industry starts with the meat-eating consumer.
How those expenditures are distributed is another matter entirely, however. Profits have always been earned at the expense of one sector or another. Everyone has their turn at the trough; it’s unfortunate, but that’s the way it has always been.
Who has the leverage, and where is the demand? Sometimes it’s hard to figure out just who has the leverage and if it’s worth pressing that leverage or not. The packing industry just had perhaps their most profitable year in history during 2017. Years 2016 and 2015 weren’t so good; cattle feeders suffered as well as did consumers. Cow-calf producers and yearling operators reaped record rewards because they had the pricing leverage. This is that simple supply/demand stuff.
Now that the holiday beef binge is over, all the pressure is off the prime rib and tenderloin markets. Beef prices relaxed a bit, but now they have been on the way up again. Last week, the Choice cutout was at $210.50 on reduced holiday production. Demand remains strong and packers’ margins are going back up. Traditionally, this is the time of the year when beef production goes down a bit and packer margins go up a bit. They are making about $65/head, which is great on average.
Cattle feeders held the line well the first week in January, trading cattle for $122, but had to give up a buck last week, perhaps because futures contracts had no confidence in the market. But they never seem to have confidence. However, the big red flag facing cattle feeders are carcass weights. The boys at Hedgers Edge point out that fed steer and heifer weights have been advancing, contra-seasonally, in the past four out of five weeks. Steer and heifer weights are at record levels for this time. Steer carcass weights are 5 pounds and heifer weights are 12 pounds above year-ago levels. With gain costs sharply below the selling price of cattle, this weight condition will only get worse relative to last year and the previous five-year average.
Watching Superior Livestock Auction’s Bellringer sale in Denver last week, one could see a clear decline in 700-900-lb. steer prices, which were between $140-150, while steer calves between 500-600 lbs. were trading about where they have all fall at $170-190. Cattle with a program behind them brought good premiums, while the more regular kind were at the lower end of the market spectrum.
Still, we have a lot of beef coming down the pipeline and selling it is going to be a bigger challenge. The export markets have been very good to the U.S. cattle business and there has been a lot of recent media attention given to President Donald Trump and his trade negotiations with the Korea Free Trade Agreement and NAFTA, which agriculture views as sacred cows. But it’s also the wildcard facing the beef industry and U.S. agriculture. Trade well. — PETE CROW
