Price range widens with new-crop calves

Wide swings in cattle futures prices and the continued decline in wholesale beef values dragged on calf and feeder prices this week.

After steady money early in the week, calves and yearling feeders traded mostly steady to $5 per cwt lower—instances of $10 lower—according to the Agricultural Marketing Service (AMS).

“Lower fed cattle prices and sharply lower beef futures had the cash feeder market moving lower since the last sale from two weeks ago,” explained the AMS reporter on hand for Wednesday’s sale at Green City Livestock Auction in Missouri. “Then traders at the CME pulled the rug out from under beef futures, causing feeder buyers to pull back even more.”

Feeder Cattle futures nose-dived an average of $3.85 on Wednesday; Live Cattle were down an average of $2.09. There were plenty of suspects—technical selling, limping boxed beef prices, looming larger cattle supplies. None seemed adequate to explain such a sudden and deep dive.

Then came Thursday’s Prospective Plantings report from USDA with expectations for 5.6 million more acres of corn this year (see “USDA expects lots more corn”). Corn futures sank 15¢ through July of next year, providing a catalyst for a limit-up rally in Feeder Cattle futures.

Despite the mid-week implosion, Feeder Cattle ended the week mostly narrowly positive through the front five contracts, compared to the previous Thursday. The back three contracts were 80¢ to $1.85 higher. Keep in mind they lost about $8 on average the previous week.

Although demand continues strong for weaned calves suitable for grazing, new-crop calves are also starting to exert seasonal pressure.

“This week saw many soft, fall-born calves making their way to the market, widening the price spread against the rugged old croppers in many cases,” AMS analysts say. “Many lightweight offerings in the coming weeks will be overwhelmingly new-crop, fall-born calves, which are not always in high demand by feeder buyers as many are un-weaned and carrying plenty of flesh.”

“The decline in lightweight calf prices this week is most likely the beginning of the decline that will persist through the summer and fall of the year,” says Andrew P. Griffith, agricultural economist at the University of Tennessee, in his weekly market comments. “The seasonal tendency will result in lightweight calf prices falling drastically the next seven or eight months with the biggest decline starting towards the end of May.”

Wholesale values lead fed cattle prices lower

Choice boxed beef cutout value was $5.25 lower week to week at $219.11 per cwt on Friday afternoon. Select was $7.96 lower at $206.93. At $12.18, the Choice-Select spread was the widest since the middle of December.

“The unseasonable price climb during February and March proved to be too much as packers had to lower prices the past couple of weeks to continue moving beef products,” Griffith explains. He adds that the early price increase could dampen seasonally-expected prices heading into grilling season.

Cash fed cattle prices were mostly $3 lower this week on a live basis at $133-$134 per cwt.

Live Cattle futures closed an average of $1.09 lower compared to the previous Thursday.

“Even though boxed beef prices have been on the decline the past couple of weeks, the Select cutout has been declining at a more rapid pace than the Choice, which has resulted in the Choice-Select spread widening,” Griffith explains. “This is indicative of the grilling season as consumers look for a higher quality grade to throw on the grill. The market may have to wait a couple of weeks before wholesale beef prices make a run.”

Volatility demands decisive action

“If you’re placing the hedge, place it as soon as you’ve established the feeder cattle purchase price,” says Ted Schroeder, agricultural economist at Kansas State University. “Don’t wait two days, because who knows where you will be. If you’re doing this in the morning, don’t wait until the afternoon. You can’t work off averages; an hour from now that average could be at a different point. There’s that much variability.”

Earlier this month, Schroeder was addressing overall market volatility and the within-day swings that have become common.

Schroeder used live fed steers as an example. They were bringing in the mid-$160s per cwt about this time a year ago. They dropped to $115 in late December last year; they averaged $137 the week of March 11.

“That magnitude of price movement across just a few months and that kind of volatility is something we haven’t seen historically in terms of total dollar magnitude in fed cattle markets,” Schroeder said. “Anytime a market is in rapid movement, whether it’s upward or downward movement, there’s going to be a tendency for within-day variability to also escalate.”

In this week’s In the Cattle Markets, Kate Brooks, agricultural economist at the University of Nebraska, encourages producers to develop and maintain a marketing plan that includes price risk management, which she says starts with knowing the total cost of production.

“This will help producers establish their price risk, and how to go about managing it,” Brooks explains. “Producers should find a level of risk and pricing method they can accept. The best pricing methods may change from year to year and what your neighbor did may not be the best choice for you.”

No matter the specific risk management tools employed, Brooks says, “Understanding your cost of production will help establish your pricing objectives and the triggers that make the marketing plan more valuable.”

Although Schroeder doesn’t believe market volatility like that experienced in the last year to be a new normal, he does expect it to hang around for a while.

“As we move through the first part of 2016, volatility has continued and the long-term price outlook has continued bearish with the increasing size of the cattle herd,” Brooks explains. “As market conditions have changed, producers need to again consider their marketing strategies and consider managing their price risk.”

USDA expects lots more corn

USDA’s Prospective Plantings report issued on Thursday surprised many with an estimated 93.6 million acres for corn. That would be 6% more acres planted to corn than last year and about 4 million acres more than estimates heading into the report. If realized, this would be the most corn acreage in the United States since 2013, and would be the third most since 1944.

Chris Hurt, Purdue University agricultural economist, explains the increased planting intentions for corn are prompted by the world surplus of wheat and reduced sorghum demand from China.

Conversely, the report indicates that farmers expect to reduce their acreage of both wheat (9% fewer acres) and sorghum (15% fewer acres) and replace it with corn and cotton (11% more acres).

The reduction in wheat acreage is related to low prices from the surplus of that crop and increased international competition, Hurt says. The lower demand for sorghum is the result of reduced use in Chinese feeding rations, causing sorghum prices to drop relative to corn.

“The bottom line is that 93.6 million acres is too much corn acreage that—with normal yields—will cause further building of already-large corn inventories,” Hurt says. “Production would be expected to move above 14 billion bushels, with corn prices at harvest falling to the lower $3 per bushel.”

Keep in mind that the USDA report is a nationwide survey of 83,000 farm operators that was conducted the first two weeks of March.

Hurt wonders if some of those surveyed might have over-estimated their total acreage numbers. As an example, he notes that survey respondents in the Corn Belt indicate they plan to plant upwards of 1.5 million more acres in corn, as well as 840,000 more acres of soybeans, along with more wheat acres.

Nationally, farmers intend to plant 82.2 million acres of soybeans, down less than 1% from last year’s 82.6 million acres. At the same time, soybean stocks were about 40 million bushels less than expected, but 15% more than a year earlier, according to the USDA Grain Stocks report, also released this week. Hurt says the levels of acreage and stocks would mean soybean prices for the 2016 marketing year averaging about $9 per bushel.

“These reports together suggest that the market prices of corn and soybeans will now adjust to give producers reduced financial incentives to plant corn and increased price incentives to plant more soybeans, spring wheat and other spring-planted crops,” Hurt says.

CATTLE MARKET WEEKLY by Wes Ishmael

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