Cattle markets are on the road to recovery. The September feeder cattle futures are back up to the $140 zone and fed cattle were struggling to trade above $100 last week. The December live cattle futures were trading at $106 with Feb. and April trading in the teens; this will encourage cattle feeders somewhat, but they will be trying to buy replacement feeder cattle according to the deferred futures markets.
Cash markets are trading at a premium to the board, but this episode leaves us with the eternal cattle question about price discovery. Futures markets have always been a double-edged sword. We love them when they’re long and hate them when the market’s short. Unless you know how to trade them.
Tyson announced last week that they plan on having their Holcomb, KS plant back online by the first of the year. The timing of the fire could not have been worse just prior to Labor Day, one of the largest beef consumption days of the year. No one could have forecast that event and I’m sure that Tyson wishes it didn’t happen either. The fact that they processed 30,000 head more cattle the following week was remarkable. The logistics guys were busy moving cattle to other plants and the extra labor to get all those cattle killed and processed cost a lot. But that week was the big hump for beef production and live cattle demands aren’t as strong now.
I understand that the big packers have been called to Washington, DC to meet with the Secretary of Agriculture, Sonny Perdue, which I’m sure is the start of their investigation that he promised. I’m not sure what they expect to find other than in a heartbeat we had a fire and lots of finished cattle needed to go into the Labor Day slaughter. Retailers were caught short of beef for the big weekend and packers took advantage of the market in both directions. I don’t want to sound like I don’t care but packers do what they do to make money for shareholders.
Like I said, markets are continuing to correct and I expect to see futures grow in the deferred contracts. We’re moving into a period where there won’t be as many finished cattle. The Sept. 1 Cattle on Feed report is expected to show a decline of cattle in the feedlots 99.4 percent below last year, placements are expected to be 94.5 percent below and marketings will be 98.3 percent below with one less slaughter day. The marketing rate was very good during August. As expected, boxed beef markets have returned to pre-fire levels—Choice at $118.24 and Select at $191.97. There is a $26.27 spread between the two products, which is why Southern feds are lower than Northern fed cattle markets. Carcass weights are still below year-ago levels. Fed cattle slaughter appears to be on a normal track.
Retailers must be furious too. By all accounts there were plenty of fed cattle, and if you’re a small retailer featuring beef, you would think there would be some price stability. Then a fire hits a big beef processing plant and you must fill your needs on the spot market at prices $20 higher than you expected to pay. Retailers or packers had no real reason to go long on procurement needs.
So now what are we going to do? Hold more meetings on the beef pricing system. With those packers earning $500 a head, folks are going to try and come up with ideas on how to tie live cattle prices to the retail beef price. More formula pricing, crazy ideas will come along. Remember, every segment of this industry has their turn at the trough. There are very few occasions when every segment in the beef chain earns a profit at the same time.
Looking at beef price spreads published by USDA, which shows the farmers’ share of the wholesale price, the industry has been running at between 46.7 percent in January of 2019 down to 38.8 percent in August. In 2014 the ranchers share was 55.2 percent when fed cattle averaged $154.39. That year cattle feeders were making $400-500 per head.
So, do you really want the government to come in and do price controls on beef or other meats? The pork guys have a way smaller margin than the beef industry, but they are an entirely different industry. I don’t think we want the government as a business partner, and I don’t think we’re going to find a boogeyman behind the curtain pulling the levers of the beef industry. — PETE CROW
