Fall calf run begins with solid undertone

The cork is just beginning to pop on spring calves making their way to town, but early on, the market underpinning appears solid.

Leaf through a number of weekly auction reports from across the country this week and buyers continued to pay steady to mostly higher prices for feeder-weight cattle and heavier, weaned calves. Bawling, un-weaned calves continued to face pressure.

Specifically, the Agricultural Marketing Service (AMS) pegged feeder steers and heifers at mostly steady to $7 per cwt higher on the week. Calves were mixed from $4 lower to $5 higher.

Aggressive fed cattle slaughter and apparent packer profitability continued to buoy markets. Higher futures prices added support, though trading throughout most of the week was of the two-sided variety.

Except for 22¢ higher in recently minted away Sep, Feeder Cattle futures closed an average of $2.18 higher week to week on Friday ($1.72 to $2.92 higher).

Except for 57¢ and 45¢ higher in the back two contracts, Live Cattle futures closed an average of $1.79 higher ($1.37 to $2.15 higher).

That, along with steady to higher prices for fed cattle at auction earlier in the week, likely explain at least part of cattle feeders’ confidence to take a pass on packer bids through late Friday afternoon.

For instance, buyers paid a weighted average price of $108 per cwt at Wednesday’s weekly Fed Cattle Exchange auction (delivery at 1-9 days and 1-17 days).  

Similarly, slaughter steers sold mostly steady to $1 higher at Sioux Falls Regional Livestock on Wednesday. Slaughter heifers traded steady to $3 higher.

Established prices for country trade the previous week were at mainly $108 on a live basis and $172 in the beef.

Wholesale beef values continued at a sluggish pace, too.

Choice boxed beef cutout value was 60¢ higher week to week on Friday at $197.22 per cwt. Select was $1.27 lower at $187.23.

“The Choice beef market remains fairly stagnant compared to last week, while no one is showing Select beef much support either,” says Andrew P. Griffith, agricultural economist at the University of Tennessee, in his weekly market comments. “Consumers have continued to purchase beef throughout 2017, which remains a strong sign for the cattle complex, but the early fall period is simply a difficult time to push beef prices higher given the quantity of beef being produced. Beef production tends to be seasonally highest during the early weeks of fall, which is a factor of increasing slaughter rate and increasing slaughter weights. There have been several weeks recently when federally inspected cattle slaughter has dared to reach 650,000 head per week (total cattle slaughter), compared to the five-year average when bumping up against 620,000 head per week was a big deal.”

Although dressed weights continue to increase seasonally, Griffith says they remain 10-15 pounds lighter than a year ago.

“Larger slaughter and relatively lower dressed weights are largely due to increased cow slaughter compared to last year, though steer and heifer slaughter are above year-ago numbers,” Griffith says.

U.S. beef exports continue steamy pace

International demand for U.S. beef continues to help underpin cattle prices.

Export value in August (most recent data) was the second-highest on record at $679.1 million, up 20% from a year ago, according to statistics released by USDA and compiled by the U.S. Meat Export Federation (USMEF).

In terms of volume, August beef exports of 112,069 metric tons were the most this year and 5% more than a year earlier.

For January through August, beef exports increased 10% in volume and 16% in value ($4.65 billion) compared to the first eight months of 2016.

Export value per head of fed slaughter averaged $290.05 in August, up 13% from a year ago. Through August, per-head export value was up 9% to $275.81.

Incidentally, August beef exports to market-leading Japan were 22% more than a year ago and the largest of the post-BSE era. Export value to Japan increased 35% and broke the $200 million mark ($200.05 million) for the first time since May 1996. For January through August, exports to Japan were up 23% in volume and 30% in value ($1.28 billion).

You’ll recall that Japan’s frozen beef safeguard was triggered in late July, increasing the duty on frozen beef imports from the U.S.—and other suppliers without a trade agreement with Japan—from 38.5% to 50%. Although it will likely take some months to see the true impact of the higher duty, August demand was not significantly affected, according to USMEF.

Winter stocker potential improves

“A strong rally in Feeder Cattle futures since late August offers improved winter stocker profit potential,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his weekly market comments. “At current levels, March Feeder futures would allow a 750 pound steer to be priced at roughly $150 per cwt in Oklahoma. A 475 pound steer at today’s prices would have a March 1 breakeven of $130-$137 per cwt at 750 pounds, depending on pasture and other costs. Such opportunities to price in winter stocker margins are rare and generally fleeting.”

Peel adds that the strength of current prices for spring Feeder Cattle contracts is difficult to justify from a fundamental perspective.

“Producers should act promptly if these futures price levels are attractive,” Peel says. “Remember that futures have been notoriously volatile in recent years and Feeder futures can move $11.25 per cwt in two days of limit moves. While no major cattle market weakness is foreseeable at this time, general expectations are for modestly lower cattle prices in 2018 on continued growth in cattle supplies and beef production. There is clearly more downside risk than upside potential from current levels.”

Packing capacity appears sufficient

Unsurprisingly, a growing number of producers are wondering whether packing capacity can keep up with the expanding beef herd.

“Plants will add additional slaughter hours to manage the extra supply through 2019,” says Trevor Amen, CoBank animal protein economist. “The biggest potential concerns—as the industry drifts closer to maximum packing capacity—are labor availability and temporary plant closures for unforeseen maintenance issues.”

In a new report from CoBank's Knowledge Exchange Division, Amen explains Saturday slaughter hours steadily increased since the middle of 2016. He adds that processors are expected to increase investments in automation and robotics to reduce the risk of skilled labor shortages.

Packers have proven their ability to meet the need so far this year with multiple weeks of fed cattle slaughter above 500,000 head.

Although the nation’s cowherd continues to expand, Amen says the industry has the capability to meet beef packing capacity needs without reopening shuttered plants or constructing additional facilities.

Expansion is most aggressive in history

“The beef herd expansion we've seen from 2014 to 2017 has been the most aggressive three-year start to any expansion on record,” Amen says. “Recent slaughter numbers and the cattle on feed mix indicate the expansion rate is slowing, but barring any significant export market disruptions or weather events, expansion will continue through the end of the decade.”

USDA estimates the 2017 calf crop will top 36 million head, an increase of 2.9% over 2016 and an 8.3% increase compared to the cyclical low calf crop in 2014.

CoBank forecasts beef production to increase another 3-5% in 2018 and 2019.

Consequently, Amen emphasizes demand—beyond expectations so far this year—is critical, especially export demand.

“Export demand has been strong,” Amen explains. “Momentum has been building since July 2016 and forecasts continue to adjust upward for the remainder of this year. Combined with decreased imports, we're experiencing a more favorable net trade balance and keeping domestic per capita supplies in check while supporting prices levels.”

According to Amen, U.S. beef exports are on pace to increase 7-9% this year and 5-7% next year.  

As usual, added opportunity comes with extra risk. In this case, Amen explains that increasing dependence on export markets offers significant growth opportunities for the industry, but also increases the uncertainty and risk of domestic oversupply.

Look in the November issue of BEEF for more insights from Amen and others regarding current beef packing capacity relative to herd expansion.

CATTLE MARKET WEEKLY by Wes Ishmael

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