18 March 2011

5 minute read

North America

Records Were Meant To Be Broken

That previous high at $108.80/cwt in the 5-Area market was a relatively short-lived spike as the US market was adjusting to the lack of Canadian fed cattle supplies following an import ban spurred by that country’s first BSE case earlier that year (and before the first US BSE case later that year). The current rally, however, looks to be more sustained. Last week’s weekly average 5-Area price was $117.89/cwt, $5.50/cwt higher than the previous week’s average of $112.39/cwt, also a record up to that point. Prices in the two consecutive weeks prior to that, at $111.02/cwt and $109.68/cwt, respectively, were also records.

The fed cattle market wasn’t the only one to post records last week. Live Cattle futures also posted an all-time high for the nearby contract at $117.65/cwt last Thursday. The “old” futures market record, which has been broken several times lately, was $103.80/cwt on July 3, 2008. Feeder cattle futures similarly posted a record high last Wednesday at $132.20/cwt (the “old” record was $119.47/cwt on September 6, 2007). The sharp rally in boxed beef prices last week also resulted in the highest boxed beef prices since October 2003.

In all this talk of record prices, two questions naturally surface: 1) why have price reached these levels, and 2) will they go higher this spring. Most editions of In the Cattle Markets for the past several months have addressed the variety of reasons why cattle prices have reached record highs. Primarily, it is due to declining supplies of cattle and modest improvements in beef demand. While the tight supply situation isn’t new information, the annual cattle inventory report confirmed it. Plus, part of the ‘surprise’ (if there was one) in reaching these price levels right now is the realization that the increased cattle on feed inventory for the past several months is the result of lighter weight calves being placed last fall that are not finished yet – and won’t be until late April at the earliest.

So, will prices go higher yet this spring? It is quite possible. Seasonally, the spring high is not usually posted in March. In only three years out of the last nineteen has the fed cattle market posted its high sometime in March. In eight of those nineteen years, the high was posted in April, with the second week of April being the most common week for the high. Although the seasonal trend would point to higher prices yet this spring, the typical seasonal increase from mid-March to the second week of April averages to only about $1/cwt. What could help the market reach higher highs is cattle weights. Carcass weights for the past several weeks have been somewhat erratic, with some sharply lower weights being reported. Some of this was a function of winter storms that reduced weights for a week or two. Some of this was likely cattle being pulled ahead and marketed earlier than planned due to good prices. Additionally, part of the drop in cattle carcass weights is attributed to a decline in cow weights, which may signal more dairy cow slaughter relative to beef cow slaughter. Regardless, lower weights imply packers have to slaughter more cattle to generate the same amount of beef production, which helps the market stay current.

The strength of the fed cattle market has kept feedlot operators actively placing cattle on feed through this winter. As projected margins on placements eroded through February, it appears like placements last month slowed compared to that of the last several months. However, this Friday’s Cattle on Feed report is likely to show an increase of around 2 per cent in February placements compared to last year. Partly this reflects cattle feeders willingness to buy cattle “on the come” given current closeout profits and lack of cattle to place later this year. Additionally, increased imports of feeder cattle from Mexico last month resulted in more placements in the Southern Plains.

For current placements in mid-March, the $0.64/bu drop in the corn market (basis March corn futures) last week provides substantial help to deteriorating margins. However, much of it was bid into feeder cattle markets that were up anywhere from $2-5/cwt, or more, last week. Feeder cattle futures gained almost $3/cwt last week. Feeding cost of gain, projected at the current Omaha, NE corn price of $6.50/bu and wet distillers grain price of $68/ton, is about $102/cwt. Feedlots still feeding corn bought and bunkered during harvest last fall likely have cost of gains well below that figure yet, while others without access to distillers grain may have a higher cost of gain. At current feeder cattle prices, basis Nebraska, and typical feeding performance, this would result in a loss of about $35/head for yearling placements. While projected red ink isn’t desirable, it would only take a $3/cwt rally in August or October futures to erase these losses.

As noted above, last week the fed cattle market rallied to all-time highs. Active trade developed on Wednesday, with live prices $5-6/cwt higher than the previous week. Dressed prices in Nebraska ranged from $185-192/cwt, with the bulk of the trade occurring at $190/cwt. The fed cattle market was supported by higher futures and a steadily increasing boxed beef market. By the end of the week, Choice boxed beef posted a high at $181.46/cwt and Select reached $179.88/cwt. Look for asking prices for this week’s showlist to start the week at $120-122/cwt on a live-weight basis. Monday morning’s strength in boxed beef prices (more than $3/cwt higher) is supportive to higher prices this week.

Last week’s WASDE report made no changes to the US corn supply and demand balance sheet despite expectations for lower ending stocks. This, combined with general economic concerns surrounding the impacts of the earthquake and tsunami in Japan, led longs to heavily liquidate the corn market. Through Thursday last week, Omaha corn was $0.56/bu lower than the previous Thursday, but corn was down about $0.17/bu on Friday as well. The lower corn market, combined with higher fed cattle prices, supported higher feeder cattle prices last week. Average prices for yearling-weight steers were steady to $1/cwt higher in Nebraska and Oklahoma last week. Prices for 500-600 lb. steer calves gained $2/cwt in those markets.