Fundamental strength buoys market

Market optimism grew this week as futures prices gained strength and snug front-end fed cattle supplies suggested higher prices. The notion was justified when trade finally developed late Friday with moderate trade and good demand.

Live prices were $3-$4 higher than the previous week at $129-$130 per cwt. Dressed trade was $5 higher at $205.

“Breaking through the $130 barrier is a big psychological gain as that price level is the highest since the middle of June 2017,” say analysts with the Agricultural Marketing Service (AMS).  

Live Cattle futures closed an average of $2.60 higher week to week on Friday ($1.55 to $4.02 higher).

Languishing wholesale beef values found some life and helped, too. Choice boxed beef cutout value was $3.36 higher week to week on Friday at $209.88 per cwt. Select was $2.38 higher at $205.12.

“The finished cattle market is outperforming many people’s expectations right now, resulting in the feeder cattle market outperforming expectations,” says Andrew P. Griffith, agricultural economist at the University of Tennessee, in his weekly market comments.

Calves and feeders trade steady to higher

Steers and heifers sold steady to $5 per cwt higher, according to AMS.

“Buyers continue to pay up for cattle suitable for summer grazing, as they anticipate the supply of those calves will get more difficult to find the further into the year they get,” AMS analysts say.   

Feeder Cattle futures closed an average of $3.71 higher week to week on Friday ($2.85 to $4.65 higher).

Growing drought implications are a wildcard, of course.

“Record-setting drought continues to push lighter weight yearlings into the market early this year,” noted the AMS reporter on hand for Thursday’s auction at Tulia Livestock Auction in Texas. Feeder steers and heifers there sold $1-$4 higher.

“Buyers are betting on the come as the drought picture in many states continues to intensify,” AMS analysts say. “Even though rainfall totaled 2-6 inches from East Texas to Tennessee, the West Texas area is listed in extreme drought. Amarillo passed the four-month mark without receiving any measurable amount of precipitation.”

Increased late-year feedlot placements due to drought and relatively slower growth in last year’s calf crop lowered USDA’s expectations for beef production this year by 35 million pounds to 27.7 billion pounds. That’s still 6% more than last year’s estimated production of 26.2 billion pounds, which was 3.8% more than in 2016.

“This reflects anticipation of fewer cattle to be placed in feedlots in the first half of the year and marketed in the second half, although it is largely offset by the first-half marketing of cattle placed in late 2017,” say analysts with USDA’s Economic Research Service (ERS) in the latest Livestock, Dairy and Poultry Outlook.

ERS analysts note that the timing and weight of placements in the coming months will increasingly depend on precipitation in the Southern Plains.

Demand strength continues

“Beef demand since 2014 has been extremely strong relative to the years of the recession. Though beef production is expected to continue increasing in 2018, there is no reason to make the assumption that beef demand will decline,” Griffith says.

“The domestic consumer has continued to demand ground beef products as well as high-quality middle meats. Similarly, the export market has continued to demand U.S. beef products, which has helped absorb some of the increased production.”

U.S. beef exports last year were up 6% in volume to 1.26 million metric tons, according to data released by USDA and compiled by the U.S. Meat Export Federation. That’s the fourth-largest volume on record and the second-largest of the post-BSE era. Beef export value last year was 15% higher than the previous year at $7.27 billion, which is a new record.

Beef export value last year averaged $286.38 per head of fed slaughter, up 9% from 2016 and the second highest on record.

Cattle profit opportunity remains

Cattle producers are strongly positioned to ferret out some profitability this year. It could be a few dollars per head or near $100 for cow-calf producers, depending on which analysts you consult, as well as the cost structure of individual operations. But, margins will likely narrow across all production sectors, even before considering the nascent, expanding drought across a wide swath of cattle country.

“We’ll continue to see profitability but margins could start to slip for cow-calf producers,” explains David Williams, who leads the global protein team for Informa Economics IEG. Williams provided a market outlook during the recent Cattle Industry Convention.

At its 2018 Industry Outlook during the NCBA meeting, CattleFax projected the average price for feeder steers (750 pounds) at $145 per cwt., with a range from the upper $120s to $160 per cwt. CattleFax pegs average steer calf (550 pounds) prices at $158, ranging from $170 for the spring high to the upper $130s for the fall low.

For both this year and in terms of the current cattle cycle, CattleFax CEO, Randy Blach, says demand may keep calf prices above the cost of production for low-cost and average-cost producers.

Williams believes feeder cattle and fed cattle prices could diverge this year, unlike the current, lengthy stretch when they’ve moved in tandem. He explains that possibility stems from earlier feedlot placements last fall and early winter that could support calf and feeder cattle prices. Conversely, increasing beef production could challenge fed cattle values.

For cattle feeders, IEG projects continued profitability in the first quarter, drifting toward breakeven and then red ink as the year wears on. That’s on a cash to cash basis with no risk management.

“Cattle feeders are going to have to use risk management tools to manage price risk and create value,” Williams says.

CattleFax projects the average fed steer price this year at $115 per cwt with a range of $110-$130 per cwt. The most recent World Agricultural Supply and Demand Estimates project fed steer prices at $122-$126 in the first quarter; $117-$125 in the second; $110-$120 in the third; $112-$122 in the fourth.

IEG sees cash fed cattle prices at $125-$127 for a high, potentially falling below $100 during the seasonal summer ebb.

Keep in mind these projections are based on growing beef production.

CattleFax projects 3% more this year than last at 27.5 billion pounds, ultimately peaking at more than 29 billion pounds for the cycle. This year’s estimate is based on projections of fed slaughter of 26.6 million head, which would be 3% more than last year.

Although IEG projects the beef cowherd to continue expanding through 2020, Williams notes, “If La Nina continues to spread, we could see expansion come to a halt this year.”

The aforementioned profit potential is also based on growing beef demand.

Domestically, Williams points to cheaper beef prices to the retailer and heavy featuring opportunities, which will help beef maintain protein market share.

CattleFax expects the Annual U.S. Retail Beef Demand Index to be stable this year at 121 (it was 123 in 2016). Analysts there note that recent tax reform and expected GDP growth of 2-4% provides demand support. At the same time, they expect interest rates to increase 1.00-1.25% this year.

Internationally, Williams says, “We see wonderful global beef demand continuing. The world is getting richer every day and they want to eat more protein.” He adds that protein demand from emerging markets revolves mostly around pork and poultry, but that is supportive to beef prices, too.

CattleFax looks for U.S. beef exports to increase 6% this year to 3 billion pounds.

“The balance of trade improved by 1 billion pounds between 2015 and 2017, offsetting 40% of the production growth,” says Kevin Good, CattleFax senior analyst.

“We have to see these exports grow,” Blach says. “We’ll need to see record export numbers through the balance of the decade to keep supplies from overwhelming the market.” He adds that overall demand will be the key to maintaining fed cattle prices in the $100 area through 2020.

CATTLE MARKET WEEKLY by Wes Ishmael

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