By: Andrew P. Griffith, University of Tennessee
FED CATTLE: Fed cattle traded $5 lower on a live basis compared to last week. Live prices were mainly $105 while prices on a dressed basis were mostly $166. The 5-area weighted average prices thru Thursday were $105.04 live, down $4.88 from last week and $166.29 dressed, down $7.74 from a week ago. A year ago prices were $139.98 live and $220.09 dressed.
It is abnormal for live cattle prices to continue finding new summer lows this late in the summer. Summer lows for finished cattle are generally established late June to early August for multiple reasons. Reason number one is the number of cattle coming off feed during that time period is usually fairly high and it was this year. Reason number two is that consumer demand is a little softer during the heat of the summer which depresses prices. However, what was thought to be the summer lows would be welcome prices by most cattle feeders today.
The finished cattle market continues to find a way to decline as cattle feeders continue moving animals in a timely manner. Declining prices may be sending the wrong signal, but it may result in decent prices late in the fall.
BEEF CUTOUT: At midday Friday, the Choice cutout was $187.94 down $1.20 from Thursday and down $4.16 from last Friday. The Select cutout was $183.00 up $0.37 from Thursday and down $4.92 from last Friday. The Choice Select spread was $4.94 compared to $4.18 a week ago. The Choice and Select cutouts did not take as big of a hit as other parts of the beef complex this week.
Declining cattle prices and wholesale prices have allowed restaurants and grocers to reduce beef prices the past few months. As of July, the all fresh retail price of beef was $5.75 per pound which is the lowest retail beef price since July 2014, and 40 cents lower than its peak in July 2015.
The struggle for beef continues to be its relative price compared to competing meets. From 2006 through 2012, the all fresh retail price of beef was 1.3 times higher than the pork retail price and 3.3 times higher than the broiler retail price. From 2013 through July 2016, the beef to pork retail price ratio has averaged nearly 1.5 while the beef to broiler ratio is just above 3.7. The ratios for July 2016 were 1.5 and 4.0 for beef to pork and beef to broiler respectively.
These ratios are important because consumers do use relative prices at the meat counter. Research has demonstrated that pork and chicken are weak substitutes for beef, but consumers are looking for ways to stretch every dollar.
OUTLOOK: It feels like this market assessment is becoming redundant with the continuous decline in prices. Based on Tennessee auction averages, steer prices declined $6 to $11 per hundredweight while heifer prices declined $7 to $8 compared to last week. These price declines brought the average value of a 525 pound steer down to $650 per head while same weight heifers are just about $600 per head. If price seasonality is intact then there is more downside in the market this fall. However, this fall is not going to be the worst of it.
The cyclical nature of beef cattle prices could force the calf and feeder cattle market even lower the next couple of years. Many older producers are probably saying they can remember when prices were much lower than this and that is true, but cattle prices should be relative to the costs. The key value in the business is profit. As these prices continue to decline it is going to be difficult for producers to even cover all variable expenses.
Based on the 2016 University of Tennessee cow-calf budget, variable expenses minus land cost, marketing cost, and interest were just over $640 per cow-calf pair. There are some producers with lower variable costs and some with higher variable costs than the stated value, but this is a tight margin to be working with as producers look to future years. This cost factor becomes even more of losing proposition for producers who purchased high valued breeding females the past few years. It will be tough for these cows to generate a positive profit over their productive lifetimes.
The market is now becoming a buyer’s market and a seller’s nightmare. The blow could be softened if cattle markets begin trading more on fundamentals rather than speculation and hysteria, but the fundamentals have been pushed to the background for a couple of years. From the buyer’s perspective, this fall may be a good time to purchase some high quality cows or heifers to breed. The initial investment should be much lower as heifer prices continue to wane.
Additionally, this fall should play well into stocker producers’ plans as it will not cost nearly as much to secure inventory. The key message is to manage costs and keep financial records to determine if the enterprise is profitable or losing money.
ASK ANDREW, TN THINK TANK: A producer recently asked what the prospects were for preconditioning calves this winter. The easy response was that it is looking more and more promising every day as the prices are collapsing during the fall market. This response, however, is not sufficient. Producers must know what their animal is worth today and have a good idea of what it is going to cost to get those animals to a desired weight at a particular time period to answer the question. The end game is that the value of gain must exceed the cost of gain for preconditioning to pay. It is not always a clear cut answer as there are costs and risk associated with this process. The hardest part of the equation is trying to figure out what the value of the animal will be at the end of preconditioning. There is value in reducing buyer risk and adding weight, but the costs cannot exceed the additional revenue.
Please send questions and comments to email@example.com or send a letter to Andrew P. Griffith, University of Tennessee, 314B Morgan Hall, 2621 Morgan Circle, Knoxville, TN 37996.
FRIDAY’S FUTURES MARKET CLOSING PRICES: Friday’s closing prices were as follows: Live/fed cattle – October $104.40 3.00; December $105.40 2.80; February $105.55 2.33; Feeder cattle – September $134.23 2.63; October $131.28 2.78; November $128.68 2.40; January $125.20 1.83; September corn closed at $3.30 up $0.04 from Thursday.