Calf and feeder prices lose some steam

Prices for calves and feeder cattle drooped lower this week, pressured by a break in futures, which came on the heels of last week’s monthly Cattle on Feed report. Higher placements were expected (see “Increased feedlot placements and marketings will continue”) but the 10% increase weighed on psychology as wholesale beef values turned softer.

Calves traded mostly steady to $5 per cwt lower, according to the Agricultural Marketing Service (AMS). Yearlings sold steady to $5 lower early in the week and then mostly $3-$8 lower.  

Harsh winter weather in the Central Plains and Northern Plains reduced receipts at some auctions and restricted cattle movement during the holiday-shortened week.

“Cattle futures reached an overbought status and had five straight sessions of losses, before closing higher on Thursday,” AMS analysts explain. “As futures turned defensive on a bearish reversal it definitely put stress on the feeder cattle market.”

After $2.75 lower in soon-to-expire March, Feeder Cattle futures closed an average of $7.99 lower across the board; most of the losses coming last Friday and Monday.

Live Cattle future closed an average of $3.78 lower week to week.

Following the previous week’s rally, wholesale beef values turned sharply lower.

Choice boxed beef cutout value was $7.45 lower week to week on Friday afternoon at $224.36 per cwt. Select was $7.44 lower at $214.89. That’s about where price levels were two weeks ago.

Though too few to trend, live sales were $2-$4 lower in Nebraska and Iowa-Minnesota at $135-$137. Limited dressed sales in those regions were $4-$5 lower at $218.

Live sales in the Southern Plains on Thursday were mostly $3 less than the previous week at $136.

Beef production in February (1.89 billion pounds) was 7% more than the previous year, according to USDA’s National Agricultural Statistics Service this week. Cattle slaughter (2.29 million head) was up 5%. The average live weight for the month was up 17 pounds at 1,372 pounds.

On the other hand, frozen beef supplies appear to be less burdensome.

Total pounds of beef in freezers on Feb. 29 were down 5% from the previous month and down slightly from last year, according to the monthly USDA Cold Storage report released yesterday.

Total red meat supplies in freezers were down 3% from the previous month and down 5% from last year.

Total frozen poultry supplies were up 3% from the previous month and up 10% from a year ago. Total stocks of chicken were down 2% from the previous month but up 11% from last year.

Increased feedlot placements and marketings will continue

Futures markets and then cash trade this week took a bearish view of last Friday’s Cattle on Feed report—especially placements of 10% more year to year in February—but Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, says the reality requires perspective.

“First, the extra day in February allowed more placements during the month,” Peel explains in his weekly market comments. “Secondly, it was compared to a small 2015 value that was nearly 5% under the five-year average. Nevertheless, it was up and was the first significant year-over-year increase in placements in two years. Larger feeder cattle supplies mean that more cattle will be coming to feedlots and increased year-over- year placements will likely be the expectation for many months to come.”

Between the expected increase in feedlot marketings over the coming months, along with heavier carcass weights, analysts with the Livestock Marketing Information Center (LMIC) expect U.S. beef production to be 2-4% higher in the first half of this year compared to 2015, with production accelerating in the second half. In this week’s Livestock Monitor they explain beef production next year is forecast to be 3-6% more than this year, with tonnage similar to that in 2013.

“Look for fed cattle prices to be lower in the second half of 2016 compared to the first six months of the year. Larger slaughter-ready cattle supplies and large pork production could easily cause prices to be the lowest this year during the fourth quarter,” LMIC analysts say.

Preliminary LMIC forecasts see fed cattle prices this fall unchanged to slightly above the quarterly average levels of late 2015. Yearling and calf prices are forecast to remain below those in 2015.

“In the fourth quarter of this year, look for prices of 700-800-pound steers to be 8-12% below 2015—upper $150s to lower $160s per cwt in the Southern Plains,” LMIC analysts say. “Look for 500-600-pound steers to be 1-10% lower year on year—upper $180s per cwt to mid $190s in the Southern Plains.”

FAPRI projects cow-calf profit to continue

“Though profitability in the cow-calf sector is down sharply, it is still above historical levels. This will promote further small increases to the herd in coming years,” say analysts with the Food and Agricultural Policy Institute (FAPRI) at the University of Missouri, in that organization’s U.S. Baseline Briefing Book released earlier this month.

FAPRI projects net returns per cow this year at $211.53 per head, declining to $85.55 next year and to $9.63 in 2018. After entering negative territory in 2019 and 2020 (-$21.91 and -$14.02 respectively) projections call for annual returns growing from $10.45 in 2021 to $98.32 in 2025.

In terms of specific prices, FAPRI projections see fed steer prices (all grades, 5-area direct) declining from an average of $133.41 per cwt this year to a period low of $117.94 in 2018. Prices increase from there to $135.74 in 2025.

Feeder steers (600-650 pounds, Oklahoma City) average $194.34 per cwt for this year in the projections. They decline to a period low of $155.12 in 2019 and then increase to $189.51 by 2025.

The FAPRI baseline model uses different variables to project a wide range of market outcomes for 2017-2025. Analysts note some of the resulting 500 outcomes are much higher or lower than the averages in the report.

By necessity, the model utilizes macroeconomic assumptions. Among them:

•    Domestic GDP growth averaging 2.4% per year from 2017 to 2025. “IHS Global Insight forecasted in January that U.S. real GDP growth would accelerate in 2016 to 2.7%,” FAPRI analysts note.

•    The prime lending rate increases by 3 percentage points between 2015 and 2019.

•    West Texas Intermediate crude oil prices increase from $45 per barrel in 2016 to $81 in 2020. “After 2020, we assume prices for oil and other energy sources will increase at the same rate as inflation in the GDP deflator (2.1% per year),” FAPRI analysts say.

Increasing carryover stocks from hefty global crops of grains and oilseeds the past couple of years continue to pressure crop prices in the FAPRI projections.

As an example, projected corn prices in the FAPRI projections average $3.75 per bushel for the 2016-17 marketing year. Corn prices average less than $4.00 per bushel for the 2017-2025 period. Corn prices exceeded $5.00 per bushel in about 10% of the 500 FAPRI outcomes for each year, and fell below $3.00 per bushel in more than 10% of the outcomes.

Overall, Pat Westhoff, FAPRI director says, “We are looking at several years of pretty tight financial situation for U.S. agriculture. Farm income is less than half of the 2013 peak and we expect it to remain low for the next several years…We’ve had some cost reductions, but not nearly enough to offset the decline in receipts.”

With farm income below peak levels and interest rates forecast to increase, Westhoff says there will be continued pressure on farm finances and farm real estate values.

For perspective, FAPRI analysts explain that U.S. average farm real estate values increased by 50% between 2007 and 2015, according to USDA’s National Agricultural Statistics Service.

FAPRI projections call for farm real estate values declining by $250 per acre between 2015 and 2019. That’s on average, of course. The FAPRI folks note that actual results will differ across the country and will be sensitive to developments in agricultural markets and the economy.

CATTLE MARKET WEEKLY by Wes Ishmael

Calf-Feeder Trade

Regional Steer Price Average

North Central

South Central

Southeast

CME Feeder Index

CME Feeder Cattle Futures

CME Live Cattle Futures

CME Corn Futures

CME Oil Futures (ICE-WTI)