Herd expansion is moderating

Cattle prices drop amid bearish sentiment

Fundamental support was tough to come by this week.
Steers and heifers traded mostly $2-$10 per cwt lower, according to the Agricultural Marketing Service (AMS), as calves and feeders followed fed cattle prices lower, while futures prices continued to dredge new depths.
“As calf and feeder cattle prices continue to decline, once profitable cattle are now resulting in losses for many producers,” says Andrew P. Griffith, agricultural economist at the University of Tennessee, in his weekly market comments. “The concerning part is that the price decline will likely continue the next few weeks, resulting in even more losses for spring-born calves. It is not just calf prices on the decline as slaughter cow prices have nearly been cut in half since reaching their historical apex.”
Besides leading some producers to postpone marketing in hopes of a turnaround, current uncertainty is cleaving buyer interest.
“With cattle feeders facing large losses and a downward moving market, there are few buyers willing to take on additional risk by buying calves that aren’t fully preconditioned,” explained the AMS reporter on hand for South Dakota's Mitchell Livestock Auction on Thursday.
The same day, at Billings Livestock Commission in Montana, the AMS reporter said buyers bid aggressively on all feeders, despite struggling CME contract prices. That same reporter noted, “The excess supply of corn and feed across the country have many feeders looking to feed cows…Feeding cows sold steady to weak as numerous new market participants helped prices hold near steady.”
On Friday, cattle futures—already tottering from early-week bearishness—crumbled beneath the ongoing weight of increased beef production, plentiful supplies of competing meats—including hog numbers that hint at shackle space running short—and slogging wholesale beef values.
In between expiring spot Sep and newly minted away Sep, Feeder Cattle futures were an average of $8.11 lower week to week ($6.40 to $10.07 lower).
Week to week, Live Cattle futures were an average of $6.16 lower ($4.52 to $8.37 lower).
Cash fed cattle prices were $2-$6 lower (live basis) earlier in the week at $101-$104 per cwt; as much as $10 lower late-week with sales in Nebraska at $100. Dressed sales were $3-$8 lower at mostly $160-$163.
“Every week, it becomes increasingly difficult to prognosticate the direction of the next week’s prices, much less the magnitude of that change,” Griffith says. “However, the hardest part is explaining why prices did what they did in the current week. Steer and heifer slaughter rates have been relatively high due to pulling cattle forward, which may be a key reason for lower prices. If higher harvest rates are in fact the reason for lower prices, then the market should experience substantial price resurgence this fall as the number of market-ready cattle decline.”
While projected current, positive margins suggest packers have every incentive to boost weekly harvest numbers even more, reports continue to circulate that labor shortages are proving to be a challenge.
According to Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, August beef production was up 6.9% (average daily basis) compared to last year and up 5.9% year to date.
Although carcass weights are climbing, Peel explains the seasonal increase is less than last year.
“This seasonal increase in carcass weights does not indicate a lack of currentness in the feedlots,” Peel says. “Steer carcass weights currently are 13 pounds less than the same date last year and there are indications that feedlots have pulled fall marketings ahead in August and early September,” (see Feedlot marketing appears to be current below).

Lower returns are slowing herd expansion

“Returns this year will not cover the total economic costs for most cow-calf operations,” say analysts with the Livestock Marketing Information Center (LMIC), in the most recent Livestock Monitor. “While estimated costs of production have decreased slightly in 2016, based on cheaper fuel, feed, and slight drops in pasture cost, it has not been enough to offset declining calf prices.”
LMIC forecasts fourth-quarter calf prices this fall to be about 25% less than last year. As of late September, LMIC estimated cow-calf returns this year (return over cash costs, plus pasture rent) at about $15 per cow, the lowest since 2009.
“Note that these calculated returns do not include all economic costs of production…,” LMIC analysts say. “Every operation has different resources and costs. Year-over-year changes in calculated returns are more insightful than the specific numeric levels.”
Estimated cow-calf returns last year were $285 per cow.
Steeper and quicker declines in calf prices and cow-calf returns suggest slowing herd expansion.
“It is clear from the slaughter data trends that the summer of 2016 was the first step in the transition to lower national herd growth rates,” LMIC analysts say. “As 2017 unfolds, the year-over-year increase in female slaughter is projected to continue causing a more notable slowdown in cowherd growth as of Jan. 1, 2018.”
So far this year, female slaughter data continues to support a year-over-year increase in total cattle inventory of approximately 3.5% as of Jan. 1—similar to last year. But, LMIC analysts explain, “Some other factors, including the year-on-year drop in U.S. feeder cattle imports from Canada and Mexico, has led LMIC to suggest U.S. herd growth may moderate some and could be in the 2.5% and 3.5% range.”
Currently, LMIC estimates female cattle slaughter for this year at 43.5% to 44.0% of total cattle slaughter.
“Based on historical relationships going back to 1950, we have never experienced that low of a female cattle slaughter ratio resulting in a decreased total cattle inventory in the corresponding Jan. 1 report,” LMIC analysts explain. “It is not until we get into about a 48% ratio (female slaughter to total slaughter) or greater that a decrease in cattle inventory is likely.”

Feedlot marketing appears to be current

“Ample supplies of feeder cattle and favorable feeder prices should encourage feedlots to maintain a high turnover rate and avoid the wreck that resulted from extremely heavy carcass weights last year,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his weekly market comments.
That’s worth keeping in mind, considering the increased numbers in the monthly Cattle on Feed report released last week. Though expected—especially with two more business days in August this year than last—the double-digit increases in August cattle placements added to negative market psychology.
“Placements totaled 1.88 million head, an increase of 15.13% from August 2015 and a 0.14% increase from the 5-year average from 2011 to 2015,” according to Brian Williams, Extension livestock economist at Mississippi State University, in the most recent issue of In the Cattle Markets.
“This month’s numbers continue the trend of increasing heavy placements, with cattle larger than 800 pounds seeing a 21.2% year-over-year increase while cattle less than 600 pounds saw an 8.9% year-over-year decrease in placements.”
On the other side of the scale, cattle marketed in August (1.87 million head) were 17.63% more than last year and 1.98% more than the 5-year average, Williams says. Though the total on-feed inventory (10.14 million head) was 1.49% more year to year, he points out it was 0.50% less than the 5-year average.
“While feedlots are clearly moving more cattle through, the on-feed total is not growing on a year-over-year basis as marketings outpaced placements in August,” Peel explains. “The strong pace of marketings is confirmed with August cattle slaughter up sharply year over year. Heifer slaughter outpaced steer slaughter in August, up 13% from last year (on an adjusted daily average basis) compared to steer slaughter up 5.4% year over year.”
For the balance of the year, steer slaughter is expected to moderate, still up but by a smaller amount on a year-over-year basis, Peel says, while heifer slaughter will continue sharply higher compared to last year.

CATTLE MARKET WEEKLY by Wes Ishmael

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