By the time you read this, we will be only a few days away from the beginning of the fourth quarter (Q4). For the cattle industry this year, the Q4 is especially important.
First, did we hit the seasonal low in the third quarter (Q3)? Or is it still coming? Those questions were at the forefront of market discussion last week.
“Bears haven’t given up hope of one more flush to the downside, having the advantage in their favor of seasonally increasing carcass weights and the painful memories of Q4 lows the last two years,” noted Cassie Fish of the Beef Report last Monday.
“This market may not be ready for a big rally anytime soon, but given that the industry continues to plow through fed cattle numbers week after week, odds are decent this year will see a Q3 low.”
By the end of the week, however, her perspective had firmed up.
“With only seven full trading days left in the Q3, it’s beginning to look more and more as if the Q2 high to Q3 low move is complete.”
She continued to argue with the proverbial bears, asserting that fed cattle supplies and large carcass weights are not enough to think 2015 and 2016 will repeat themselves.
“Any meat trader knows the beginning of the seasonal advance of rib prices is days, not weeks, away.”
So, if the seasonal low is in on fed cattle and beef, what does that mean? Higher prices, hopefully. Not everyone agrees with this optimism however.
According to the most recent World Agricultural Supply and Demand Estimates (WASDE) report (Sept. 12), estimated live prices for 5-Area steers in Q3 stood at $110-113. For Q4, however, that estimate was $107-113, suggesting the USDA stills sees the low on the Q4 horizon. The WASDE report cited “current price weakness” for the reduced estimates on cattle prices for the remainder of 2017.
The question of the “wall” of fed cattle may also play a part in that projection.
“Front-end fed cattle supplies project to increase relative to last year during October,” commented Andrew Gottschalk of Hedgers Edge.
“A more rapid build projects to begin during November. The question remains: ‘Has the recent cash low discounted this increase in supply?’ Packer and retail beef margins would indicate the answer is ‘yes,’ provided no backlog of fed cattle develops.”
Packer power
Packers have been enjoying week after week of high per-head margins. Last week, margins were estimated at $140-150 per head. Estimates were similar the week before.
“It doesn’t get any better than having people waiting at the gate and you are the gatekeeper,” quipped the AgCenter about packers in its market commentary last week.
“Their job is to manage the slaughter numbers in a manner that props box prices up and maintains the large margins of $150-200/head.”
The AgCenter suggested that one of the dynamics which has given packers this gatekeeping power is a combination of infrastructure and the growth of our cattle herd.
“The fact is the national cattle herd has outgrown its slaughter capacity. The double-digit increases of placements of cattle on feed during the early part of this year are now taking a toll on the structure of the industry.”
Its recommended fix to this situation is to expand the nation’s slaughter capacity; i.e., more packing plants. It did acknowledge the difficulty with that however.
“Adding slaughter capacity is not easy or quick. There are existing plants but some have been stripped of necessary equipment and others have been converted into other types of warehouse storage. Building a new plant is a large project taking a long time and requiring new technologies.”
Future of feeder cattle
In the meantime, cattle feeders find themselves in a rough place going into Q4. Despite seeing the best cattle feeding profitability per steer ever recorded during the first half of this year, cattle feeders again find themselves in a breakeven-at-best situation.
“From a cattle feeder’s perspective, all the profit potential has already been bid-into feeder animal prices,” noted the CME Daily Livestock Report last week. “For the next several months, there appears to be limited additional upside in cash feeder cattle prices.”
Gottschalk also pointed out that estimated breakevens for cattle feeders on fed cattle will advance to the mid-to-upper teens in Q4.
“This will threaten the profitability levels, adding further concern to a projected slower marketing rate.”
Added to that is the premium in the futures which is encouraging some to hold onto feeder cattle and adding more weight to them.
“It’s worth saying that the premium structure of futures, with [the December live cattle futures contract] $6-7 over last week’s cash, may well result in some cattle being fed longer, adding pounds and numbers for later,” noted Fish, referring to the week of Sept. 11-16. But she added, “There is no indication this has become a widespread trend yet.”
Q4 weather
According to the National Oceanic and Atmospheric Administration’s predictions for Q4, the country overall is looking at hotter weather. Almost all of the country—save for small northern portions of Montana and North Dakota—is estimated to have above average temperatures through to the end of December. The probability of this is listed as 40-60 percent, meaning a relatively high level of confidence.
When it comes to precipitation projections, the Pacific Northwest and northern Intermountain region is expected to get higher-than-normal precipitation levels. Conversely, the Gulf states of the South and into the Southern Plains is expected to get lower-than-normal precipitation levels for the rest of the year. The confidence levels for these predictions are both 33-40 percent.
The current drought in Montana and the Dakotas is expected to persist through the end of the year at least. Current drought conditions spanning from western Montana to the Pacific Coast are expected to improve or end, however. Drought conditions are expected to develop in two patches over Mississippi and Alabama, and Oklahoma, Arkansas, and Missouri. — WLJ
