After the recent bearish Cattle on Feed report one would not have expected the fed cattle markets to get stronger, but they did. It’s a little hard to figure that placements are growing seasonally, and the deferred futures are stronger. February live cattle were trading at $126.10 at print, which looks like a gift. Cattle feeders finally feel like they have a little leverage and were pricing cattle last week at $116, $5 higher than the week earlier.
The Cattle on Feed report showed that cattle in feedyards were 5.4 percent higher than a year ago. Feeder cattle placed into feedlots were 13.5 percent higher than a year ago, which had all the market analysts perplexed as the average guess was around 7 percent larger. Marketings were 2.9 percent higher, with one less trading day. The marketing rate is very strong, and cattle feeders are doing their best to stay current, but it’s a fine line between trying to expand the market without keeping cattle too long and making them too big, and there are more cattle coming. Carcass weights are a full 15 pounds below a year ago, confirming that feeders remain aggressive sellers. Fifteen pounds per carcass would be the equivalent of slaughtering 12,100 fewer head of cattle.
It’s not very often that we are able to grow beef supplies while expanding price or value at the same time. So far this year, we have marketed 1.39 million more fed cattle than a year ago, and retailers have kept the all-beef price at $5.73 per pound; a year ago it was $5.75 per pound. There is real bona fide demand for beef. It’s amazing that there is 4.2 percent more beef produced, while pork production is up 2.5 percent and chicken is 1.2 percent larger than a year ago. Beef is the clear winner in the major protein markets.
Perhaps the biggest threat to the market right now is the premium deferred futures markets. Cattle feeders will be tempted to hold on to cattle longer, trying to trade into a higher market. October is trading at $114 while December and February are trading in the $125 range. Cattle feeders should be able to lock in some profits at this point. But they run the risk of backing up supplies of finished cattle and driving the cash price down.
According to Andy Gottschalk at HedgersEdge, the number of cattle that have been on feed 150 days or longer is 86 percent below last October, which was low to begin with. But he says, “The bad news is that number will exceed prior-year levels by December and remain above prior-year levels through April. This category of cattle projects to increase from Oct. 1 to April 1 by 604,000 head. This compares to the same period last year when this category of cattle increased only 35,000. Be reminded that year-ago levels were declining due to reduced placements, allowing this industry to become increasingly ‘current’ into the late winter and spring. That result will not be replicated in the coming months. To the contrary, this industry will become less current (relative to 2016) during the late winter and spring unless Mother Nature intervenes. The ‘good news’ is this category of cattle projects to remain below the previous five-year average to start 2018, provided marketings remain aggressive.”
In other words, the industry must remain aggressive to avoid a backlog of cattle. He expects fed cattle prices to hold major support at $98-101 in 2018.
Feeder cattle have been a pleasant surprise by remaining much stronger than expected. Cattle feeders have been aggressive buyers of heavy feeder cattle because of the premium in the deferred futures markets, even though locking in a profit is still difficult. Again, Gottschalk says, “Premium markets tend to disappoint. Producers will feed to the premium (lending support to the market near term) only to generate a backlog of fed cattle into the premium months. The history of cattle feeding is riddled with such outcomes. On a positive note, cash fed cattle breached resistance at $110, violating a well-established downtrend. This establishes the next price target at $115. Feeder cattle and calves will likely follow any additional advance in fed cattle prices.”
Much of the increase in feeder cattle placements have been heifers. Eighty percent of feedlot placements over the past three months have been heifers. It does appear that expanding the nation’s cow herd is slowing down. With the rate of expansion, it’s remarkable that we’ve been able to move all the extra production. — PETE CROW
