Bountiful grain supports calf prices

Market bears might finally have to consider fundamentals and seasonal reality, rather than beat the drum about heavy third-quarter fed cattle supplies.

Live Cattle futures broke above the well-worn trench of recent months with spot October closing at $113.80 Friday, the highest for the contract since March.

Nationwide, calves and feeder cattle sold fully steady to $5 per cwt higher, according to the Agricultural Marketing Service (AMS). That’s compared to two weeks ago, given Labor Day last week.

Feeder Cattle futures closed an average of $4.94 higher week to week on Friday ($3.97 to $6.17 higher). That’s an average of $8.15 higher in the last two weeks.

“This week’s price movement is working against the seasonal tendency of calf prices, as are feeder cattle futures contracts,” explains Andrew P. Griffith, agricultural economist at the University of Tennessee, in his weekly market comments.

“The calf and feeder cattle market remained strong through the late summer months and the futures market is suggesting continued strength, while seasonal price trends would suggest lower prices. Prices are strong now with most of the price risk being to the downside.”

Lower grain prices, driven by expectations of even more corn and soybean production (see “Grain Prices Down—Hay Prices Climb” below), added to support. Week to week, Corn futures through next July were an average of 15¢ lower.

Cattle feeders and beef packers had yet to find common ground through late Friday afternoon. Asking prices were reportedly at $112-$114 per cwt, about $4 higher than bids. Prices the previous week were mainly $107-$108 on a live basis.

Live Cattle futures closed an average of $2.73 higher week to week on Friday ($1.27 higher at the back to $3.85 higher in spot Oct). That makes for an average increase of $4.34 over the past two weeks.

Feedyard closeouts

Although current feedlot closeout projections are forecast to continue in negative triple digits this month, the most recent Historical and Projected Kansas Feedlot Net Returns suggests significant improvement on the horizon.

For example, estimated net return for steers closed out in August was -$104.20 per head. The estimate for September is -$108.96. For the next eight months, estimated returns range from -$63.24 in April to +$18.75 in March. The outlook is similar for heifers.

Keep in mind the projections are on a cash-to-cash basis without any price risk management assumed.

The latest World Agricultural Supply and Demand Estimates (WADSE) project fed steer prices (Five Area Direct) at $108-$111 per cwt for the third quarter and at $108-$114 in the fourth quarter. Forecast prices for the first and second quarter next year are projected to be $116-$126 and $118-$128, respectively.

WASDE left projected beef production this year unchanged at 27.09 billion pounds, with anticipated increases in slaughter during the second half of the year offset by an expected decrease in carcass weights.

Beef production is forecast at 27.72 billion pounds next year. Total red meat and poultry production next year is estimated at 105.76 billion pounds, which would be 2.7 billion pounds more than this year’s estimate.

Wholesale beef values continued their seasonal decline. Week to week, Choice boxed beef cutout value was $2.29 lower Friday afternoon at $204.27 per cwt. Select was 62¢ lower at $196.47.

AMS analysts say domestic and international consumer beef demand continues strong enough to encourage aggressive harvest with about 650,000 expected for the week.

“Demand in 2018 appears to be rounding into form, similar to the previous two years with continued strong demand that has supported beef and cattle prices through the entire production chain,” Griffith says. “Several factors are contributing to strong beef demand, with the most likely being increased income levels, consumer preference for beef, and exports.”

Hurricane Florence

In the meantime, plenty of prayers are being cast toward portions of the East Coast where Hurricane Florence made landfall.

“Florence has the potential for major impacts on livestock producers due to damaging winds, record rainfall and widespread inundation and flooding,” according to Chad McNutt and John Feldt of Livestock Weather, in mid-week BEEF news.

Ahead of the storm, using the projected path and 2012 USDA Census data, they estimated there were approximately 5.4 million head of cattle and calves in the path of Hurricane Florence.

African Swine Fever continues spreading

One other wildcard is African Swine Fever (ASF) and its potential impact on global pork markets, any by extension, beef markets.

A few cases of AFS were confirmed in China at the beginning of August. After spreading in China, it was confirmed in Bulgaria and Romania, according to the Swine Health Information Center (SHIC). On Thursday this week, ASF was confirmed in two wild boars in Belgium.

“This new outbreak may represent a new change in the epidemiologic situation of ASF worldwide, suggesting that the disease may have reached pandemic proportions,” according to a Swine Disease Global Surveillance Report from SHIC. “Pandemic is a term that refers to, ‘an outbreak of a disease that occurs over a wide geographic area’, which seems appropriate in this case, considering ASF expansion across Europe, and over considerable distances in China over the last year, in addition to the sustained occurrence of outbreaks in Africa and Russia.”

Peak cow numbers next year

Beef cow numbers are projected to reach their cyclical zenith next year at 31.8 million head, according to the recently released Baseline Update for U.S. Agricultural Markets from the Food and Agricultural Policy Institute (FAPRI) at the University of Missouri. After that, cow numbers are projected to decline to 30.8 million head by 2023.

The update—projections to 2023—is to the annual U.S. Baseline Outlook published each spring, which provides 10-year projections.

Likewise, total cattle and calves are projected to plateau next year at 94.6 million head—200,000 more than this year—before declining to 91.4 million head in 2023.

With that in mind, FAPRI projects cattle prices declining through 2020, with peak beef production of 28.32 billion pounds in 2021.

FAPRI estimated the average price of a 600-650-pound feeder steer (basis Oklahoma City) at $158.51 per cwt this year, declining as low as $141.06 in 2020; rising each year after that to $162.14 in 2023.

Prices for fed steers (Five Area Direct) are projected at $116.59 per cwt this year, declining as low as $110.19 in 2020, then ultimately increasing to $119.99 in 2023.

Grain Prices Down—Hay Prices Up

Estimated record yields for both corn and soybeans are adding price support to calves and feeder cattle, while drought in some parts of the country is making hay extra expensive.

Corn production this year is forecast at 14.8 billion bushels, 2% more than last year, according to the monthly Crop Production report. Based on conditions as of Sept. 1, yields are expected to average a record-high 181.3 bushels per acre, which would be 4.7 bushels more than last year.

With supply rising more than use, the World Agricultural Supply and Demand Estimates (WASDE) increased corn ending stocks 90 million bushels from the previous month. WASDE projects the season-average corn price received by producers 10¢ cents lower, with a midpoint of $3.50 per bushel.  

Likewise, soybean yields are estimated at a record-high 52.8 bushels per acre—3.7 bushels more than last year—for record-large production of 4.69 billion bushels. The 2018-19 U.S. season-average soybean price is forecast at $7.35 to $9.85 per bushel.

The latest WASDE lowered soybean meal prices $5 at the midpoint to $290 to $330 per short ton. Soybean oil prices are projected at 28 cents to 32 cents per pound.  

Hay price outlook unfriendly

The outlook for hay prices is less friendly, courtesy of this year’s drought, as well as declining acreage over time.

According to Scott Brown, Extension livestock economist with the University of Missouri, just over 55 million acres of hay is expected to be harvested this year, which would be 10.4% below the 61.4-million-acre average of 2000 to 2010.

“U.S. hay prices have been at least 10% above year-ago levels for every month of 2018 thus far,” Brown says in a recent BEEF article. “Price increases have been even steeper in Kansas (+43.7% year to date), Nebraska (+26.6%) and South Dakota (+16.5%).”

Moreover, Brown says higher prices could hang around for a while, especially in some parts of the country.

“With calf prices projected to remain under pressure through 2020 due to rising beef production, profit margins will likely become even tighter in the years to come,” Brown says.

CATTLE MARKET WEEKLY by Wes Ishmael

Calf-Feeder Trade

Regional Steer Price Average

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