More cattle at heavier weights pulls market lower
September produced one of the worst cattle market free-falls in recent memory. Bids for cash-fed cattle plunged $25 per cwt from the last week of August to the first days of October, a 17% drop in value in just five weeks. Market-ready cattle traded under $120 per cwt for the first time in more than two years.
Such rapid and steep declines are usually the result of market-shaking bad news—i.e. mad cow or pink slime. But this wreck is one of the industry’s own making. Feedyards paid too much for feeder cattle, and they fed them too long.
“Fundamentally, there was a market imbalance,” says John Nalivka, Sterling Marketing, Vale, Ore. “Feed and energy prices were falling while record-high feedlot breakevens over the past two years have been driven by record-high feeder cattle prices.”
The Sept. 1 USDA Cattle on Feed report found 9.986 million cattle in feedlots, an increase of 2.7% from 2014. More importantly, the report underscored the fact supplies of near market-ready cattle were large and average slaughter weights were increasing. The report found the number of cattle on feed for more than 120 days was 18% higher compared to a year ago. Coupled with a sharp reduction in cattle slaughter during the spring and summer, beef supplies were set to jump dramatically. In hard data terms, USDA reported average carcass weights at 919 lb. the final week in September, fully 30 lb. per carcass more than in 2014.
“There are two ways to lower feedlot breakevens,” Nalivka says. “We can feed cattle to heavier weights, and we can lower bids on feeder cattle.”
Lowering bids is difficult because “feeding demand exceeded feeder cattle supplies. But (feeding to heavier weights) was easier with cheap cost of gain relative to fed cattle prices,” he says. “The marginal cost of each additional pound of gain was far less than the price of cattle.”
Unfortunately, holding cattle on feed tends to create a backlog and has a disastrous impact on prices. Compounding the wreck was the fact increasing days on feed resulted in a decline in average carcass yield. Packers responded by increasing the discounts for Yield Grade (YG) 4 and 5 carcasses. In mid-September, USDA reported the discount for YG 4 cattle at $9.72 per cwt and $14.72 for YG 5 cattle. Last year, the discount for YG 4s was $8.23 per cwt and $13.06 per cwt for YG 5s. Thus, the average discount for YG 4s was $13.41 per carcass more this year and nearly $15 per carcass more for YG 5s.
More cattle coming to market this fall at heavier weights means an increase in beef production—probably 2% to 2.5% higher compared to the fourth quarter of 2014. That increase comes at a time when consumer demand has softened. Higher retail beef prices throughout 2015 have encouraged consumers to buy more pork and poultry, a trend likely to remain through 2015.
“Carcass weights will come down as the industry works through the large number of cattle,” Nalivka says. “While weights will not be reduced immediately, cold winter weather and reduced feeding performance will be a factor into December and January.”
Nalivka believes the market decline this fall was “overblown,” and he expects a rebound in prices.
“But that expectation hinges on improved consumer demand,” Nalivka says. “With increases in beef production coupled with increased pork and chicken production, consumer demand will continue to be the key to prices this fall and going into 2016.”