Markets—So Far, So Good By Wes Ishmael
“When demand is pulling everything, supply takes care of itself,” says Derrell Peel, extension livestock marketing specialist at Oklahoma State University. That’s an apt description of cattle markets overall and how they’ve come through the heaviest fed cattle supplies in about a decade with what some would call remarkable strength. “On balance, I would say the feeder cattle market is stronger than anticipated for this point in the cattle cycle,” says Glynn Tonsor, agricultural economist at Kansas State University (KSU). “This is a testament to overall beef demand strength.” Through mid-July, cash fed cattle prices remained higher than many expected. Feeder cattle prices were starting to stir from their seasonal slumber. Calf prices were holding together, supported by the latter two. Although wholesale beef prices were still searching for a seasonal ebb, the price for middle meats were running ahead of last year for the same time period. Increased beef production (forecast about four percent higher this year) is applying some pressure, of course, but demand continues to clear the market at profit-possible prices for many in each sector. Although Peel projects beef production increasing another 1.5-2.5 percent next year, he notes that supply pressure will begin to moderate. Moving through the second half of this year, broiling trade issues (more later) will likely be the wildest card. Tabling those issues for the moment, the remainder of the year looks almost as positive as last year, which proved a pleasant surprise.
Taking the Medicine Early Whether you want to call it less price pressure or more support, the number of cattle placed in feedlots earlier than normal from last fall through the spring means the volume for the remainder of the year will be less than it would have been otherwise. July’s monthly “Cattle on Feed” report points in that direction. “Throughout the winter and extending into the summer months, drought conditions have plagued the Great Plains area, squeezing hay and roughage supplies,” say analysts with USDA’s Economic Research Service (ERS), in July’s “Livestock, Dairy and Poultry Outlook” (LDPO). “During the winter, many calves directed to feedlots might page 22
Summer 2018
have otherwise stayed on pastures until the spring. This limited the expectation for strong cattle placements in feedlots this spring. However, as the drought expanded into the intermountain region, available summer pastures may have become restricted as well. As a result, some stocker operations may have placed cattle in the second quarter instead of waiting until third quarter. This is likely observed in the year-over-year increase in both volume and percentage of total placements of calves weighing under 600 pounds in May 2018.” Dry conditions that spawned the earlier placements could worsen and further alter some fall marketing plans, but so far, Peel has yet to see producers having to switch gears to any significant degree. Short of sharp deterioration in current conditions, he believes the impact will continue to be minimal. Referencing data assembled by the Livestock Marketing Information Center, Peel said projections called for steer calf prices in the Southern Plains to be about 4.5 percent less this fall than last. He emphasizes that’s in comparison to surprisingly strong prices last year. This year’s average feeder cattle price for steers weighing 750-850 pounds (basis Oklahoma City) is estimated at $141-$144/cwt., compared to last year’s average of $145.08, according to ERS. The July LDPO pegs feeder prices in the third quarter at $140-$144. That’s $6 more on the lower end of the range than the previous month’s estimate and $4 more on the upper end. The
fourth-quarter estimate is $136-$144, compared to the previous month’s projections of $134-$142. First-quarter feeder steer prices next year are projected at $133-$143. “At this point, the overall supply situation of feeder cattle in 2018 is fairly well understood, leaving changes in demand (domestic beef demand, export beef demand, or demand tied to feedstuff prices) central to any price changes that occur between now and September-October,” Tonsor says. “Risk-averse producers may consider locking in prices to establish base prices, which likely correspond with positive returns for average-cost or lower-cost production operations and remove exposure to possible adverse demand developments.” If feed is marginal or you’re betting on more price pressure as the fourth quarter progresses, marketing calves sooner rather than later might make sense, according to Peel. However, he explains, “The average annual price probably won’t be much different, but there will likely be more seasonal pressure on calf prices this fall than there was last year.” “I suspect some producers who previously would see the market project attractive values of gain associated with not selling calves at weaning will be less able or excited than in other years,” Tonsor explains. “Stated differently, actual cost of gain in some regions is likely higher, given the drought, which may reduce some interest in wintering
“At this point, the overall supply situation of feeder cattle in 2018 is fairly well understood, leaving changes in demand (domestic beef demand, export beef demand, or demand tied to feedstuff prices) central to any price changes that occur between now and September-October.” —Glynn Tonsor
programs in the most drought-impacted areas of the country.” Improving projected cattle feeding returns also boost support for calf and feeder cattle prices. ERS projects fed steer prices (5-area direct, weighted average) at $107$111/cwt. in the third quarter and at $108-$116 in the fourth. The projected annual average price is $114-$117, compared to $121.52 last year. Next year’s annual is forecast at $113-$122. Although most cash-to-cash estimates of cattle feeding returns are negative for the remainder of the year, returns are projected to be significantly more robust than just a few months ago. According to the most recent KSU “Historical and Projected Kansas Feedlot Net Returns”, estimated net returns for fed steers in Kansas feedlots decline from -$219.02/head in June to -$35.30 in December. Net returns for heifers decline from -$180.06 in June to -$15.50 in December. Keep in mind these returns are calculated on a cash basis without taking into account price risk management. “If realized fed cattle basis continues to be stronger than projected, that will further improve returns,” Tonsor says. “Despite firm feeder cattle prices in June and early July, the projected feedlot margin for feeding out a 750 pound calf appears to have improved, and with lower corn price forecasts for the current and following marketing years, demand for calves for finishing may increase, supporting higher feeder calf prices,” say ERS analysts. In the meantime, every source you can find indicates that beef packers continue to windrow profits this year, on their way to an even stronger year than last year’s record. In other words, as has been the case going back a year ago, every sector has incentive to keep cattle moving through the supply chain.