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Can Cattle Break $1.20?

March 3, 2011
By: Steve Cornett, Beef Today Editor Emeritus
 
 

Texas Cattle Feeders Association’s weekly market analysis last week began like this: “Can cutout values support the current cash prices?

It’s an important question, because as that was written, fed cattle were priced at $1.10/lb. (live weight) and the replacements crowding in behind them figured to break even at $1.20 and up.

Even for modern cattle feeders, who hardly ever get a chance to buy hedgeable breakevens and are incredibly adept at using risk management tools to not only limit risk but capitalize on volatility, those are tough odds.

They’ve got the two problems: High priced corn and high priced feeder cattle.

Costs of gain in the Texas Panhandle are projecting to run in excess of $1.05/lb. Slap those up against $1.20 to $1.50 replacements and Justin Gleghorn of Brock Thompson Trading calculates a 700-800 lb. steer to need a $1.22  sale price to break even.

TCFA’s Don Close pointed out in a separate email that chances of getting to that $1.20 range hinge on getting unusually strong seasonal increases in demand for high-value portions of the beef animal.

Typically, as spring and summer grilling season arrive, the relative value of different parts of the carcass diverge. Demand for the loin cuts increase as people look to more steaks. But demand for those cuts has been hit hard by the recession. People just have less money they’re willing to spend on eating higher on the hog.

While economists—the Federal Reserve Board and USDA analysts included—have been expecting some growth in the economy this year, the recent spikes in oil and fuel prices are providing a monkey wrench in the cogs.

Close pointed out that as of last Friday, cutout values were 17.6% higher than a year ago but they would need to add another 20% or so to justify the $120 feeders will need.

He and Gregg Doud, National Cattlemen’s Beef Association economist note that these near-record prices are based on higher prices for low-value meats—the roasts and grinds taken from that chuck so many checkoff dollars have gone into promoting the last few years.

In fact, Close points out, chucks were at a record--25% higher than year-earlier. But ribs and loins are up a smaller 11.5%. The recession—as recessions always do--has had more effect on those prices than on the lower-priced portions.

For packers to push prices to that $1.20 area, it will take a near-sudden increase in demand for the middle meats at the least. On top of that, the thick cuts will need to at least hold their own—an atypical seasonal trend—or gain more. If the thick meats lose ground, Close points out, the middle meats will have to gain $2 for every $1 they lose just to hold carcass values steady.   

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