Cattle market bottom remains elusive

Calf and feeder prices churn lower

Although cattle futures found some footing this week, cash prices for all classes of cattle continued lower.
Steers and heifers traded $4-$7 per cwt lower at auction, with instances of as much as $15 lower, according to the Agricultural Marketing Service (AMS). Heifers earmarked as replacement quality hovered in the $135-$150 per cwt range.
The steepest declines were for un-weaned and fleshy calves coming to town straight off mama.
“Feeder cattle prices are under extreme pressure after last week's fed cattle trade hit a new low for 2016,” said the AMS reporter on hand for Monday’s sale at Joplin Regional Stockyards in Missouri, where steers and heifers traded $10-$15 lower.
Similarly, the AMS reporter on hand for Wednesday’s sale at Hub City Livestock Auction in Aberdeen, S.D., reported moderate demand at best for the handful of weaned and un-weaned spring calves on offer.
“It is increasingly difficult to find any positive aspects of a market whose bottom has totally disappeared,” says Andrew P. Griffith, agricultural economist at the University of Tennessee, in his weekly market comments. “Calf and feeder cattle prices appear to be falling into the abyss and there is no sign of a slow-down in the price decline for any of these animals.”
One note of optimism came from Derrell Peel this week. The Extension livestock marketing specialist at Oklahoma State University expects stocker cattle prices to strengthen some in the coming weeks as wheat pasture demand develops, perhaps a bit ahead of the bulk of the fall run of calves in late October and November.
Peel adds, “Cheap feed encourages cattle feeding, and as long as feedlots have incentives to market cattle aggressively, carcass weight increases beyond normal seasonal levels are not expected.”
Also positive are continued gains on the export front.
U.S. beef export volume in August was the heftiest in two years—including record-large monthly volume to South Korea and Taiwan—according to statistics released by USDA and compiled by the U.S. Meat Export Federation (USMEF).
Compared with the previous year, August beef export volume climbed 27%. For January through August, export volume was up 6% to 747,706 metric tons, while value was down 7% to just over $4 billion. Export value per head of fed slaughter was $256.73 in August, down 4% from a year ago. Value for January through August was $252.50, down 12%.
“Currently U.S. beef and pork are very competitive, as the production of our key competitors – Australia and the European Union – has moderated and prices have jumped,” says Philip Seng, USMEF president and CEO. “As U.S. competitiveness continues to improve, we remain optimistic that exports will maintain positive momentum through the end of this year and into 2017.”
Wholesale values falter
In the meantime, wholesale beef values failed to gain any seasonal momentum this week. Choice boxed beef cutout value was $4.28 lower week to week at $183.07 per cwt Friday afternoon. Select was $3.36 lower at $174.51.
Cash fed cattle prices continued lower with the softer wholesale values, as packers appear to maintain extra leverage from forward contracted cattle. Cash fed cattle prices were $1-$3 lower at $99 to mostly $102. Dressed sales were $1-$5 lower at $159-$160.
“There were several fed cattle that traded under the $100 mark this week, and it would not be surprising to see the weighted average price dip below that level next week,” Griffith says. “The seasonal trend is for the market to find some support, but this is also the time of year when cattle feeders gain some leverage on packers, which has yet to happen.”
“Large weekly cattle slaughter (around 600,000 head) for the past four months has been raging on as packer margins continue to run well into positive territory and cattle feeders cannot seem to gain the upper hand even with the increased harvest,” AMS analysts say.
“Larger Saturday harvests will continue to occur as long as handsome margins hold. Packers won't need to get too aggressive until they work through the stockpile they have committed to them through their formulas and forward contracts.”

Restaurant index points to contraction

Anyone looking to restaurant performance as a proxy of the nation’s economic health has reason for concern.
The most recent National Restaurant Association’s (NRA) Restaurant Performance Index (RPI) fell below 100 in August for the first time in eight months, dropping a full percentage point to 99.6.
“Restaurant operators reported soft sales and traffic in August, along with corresponding dips in the labor indicators,” explains Hudson Riehle, NRA senior vice president of research. “While the Expectations component of the index remains in expansion territory, it too has trended downward in the past several months.”
The RPI consists of the Current Situation Index (measuring current trends) and the Expectations Index (measuring restaurant operators' six-month outlook). Index values above 100 indicate that key industry indicators are in a period of expansion, while index values below 100 represent a period of contraction for key industry indicators.
The spate of restaurant bankruptcies this year also points to tougher economic reality.

Expansion economics adds to angst

“The beef industry’s transition to larger beef supplies in 2016 has been challenging,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his weekly market comments. “A persistently bearish psychology and ridiculous volatility in live and feeder cattle futures recently has contributed to a meltdown in cash markets and a mood among producers that is best described as fear. As a result, some producers (and lenders) seem unable to do much of anything at this time.”
Though exacerbated by such forces as volatility and the sheer height that prices reached at their apex, the cyclical price decline should come as no surprise.
In his weekly market outlook at the end of August, Chris Hurt, an agricultural economist at Purdue University, explained prices are moving lower, expectedly, as producers fill the supply gap cleaved by drought and feed supply price shocks during the last decade.
“There seems to be a fear that there is no bottom to markets once the cow herd expands and beef production starts to rise,” Peel says. “There seems to be a feeling that any data with a positive year-over-year change (herd inventory, cattle slaughter, beef production, feedlot placements, etc.) is cause for rampant bearishness.
“Perhaps the fact that the industry has not experienced a cyclical expansion since the early 1990s is part of the problem. Some younger producers and traders have never participated in herd expansion, and no one in the industry has in more than 20 years.”
For perspective, Peel expects the beef cowherd to show growth on Jan. 1 of 1.5-2.5%.
“Added to the expansion in 2014 and 2015, the Jan. 1, 2017 beef cow herd inventory is likely to be near 31 million head,” Peel says. “This puts the beef cow herd inventory back to the level at the beginning of 2011 before drought liquidation dropped the herd by an unplanned 2 million head.
"Although the expansion since 2014 is properly characterized as cyclical expansion, it can also be thought of drought recovery so far. “There is little doubt that the herd was poised to expand in 2011 in the absence of drought, so it hardly seems likely that expansion to get back to that level can be thought of as drastically overshooting the mark.”
“Why are animal prices moving lower?” Hurt asked. “The big picture answer is that the animal industries are rebuilding per capita supplies because of lower feed prices and restocking brood cows in the Southern Plains. It seems increasingly likely that the meat industry will totally fill the supply gap that was created from 2007 to 2014…The meat industries are expected to continue to increase supplies until animal product prices drop to levels that approach breakeven levels.”

CATTLE MARKET WEEKLY by Wes Ishmael

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