By: Andrew P. Griffith, University of Tennessee
FED CATTLE: Fed cattle traded $3 lower on a live basis this week compared to a week ago. Live cattle prices were mainly $131 to $132 while dressed trade primarily ranged from $205 to $206. The 5-area weighted average prices thru Thursday were $131.70 live, down $0.50 from last week and $205.96 dressed, down $4.04 from a week ago. A year ago prices were $160.54 live and $255.15 dressed.
Cattle trade the past few weeks had not been occurring until late in the week. However, cattle trade heated up on Thursday this week. The softer prices are consistent with softer live cattle futures and weakening international markets. International markets continue to put a damper on cattle markets as commodity prices tend to follow the international economy for certain durations.
The concern with the situation is that outside forces make it difficult to know the true value of commodities such as cattle. Eventually, the impact of the outside forces on cattle prices will weaken and allow the market to value cattle appropriately. How long this will take is yet to be determined, but the equities market will have to simmer down before any changes occur.
BEEF CUTOUT: At midday Friday, the Choice cutout was $216.67 down $0.35 from Thursday and down $5.83 from last Friday. The Select cutout was $213.27 down $1.00 from Thursday and down $5.18 from last Friday. The Choice Select spread was $3.40 compared to $4.05 a week ago.
Winter beef demand continues to put pressure on wholesale beef prices. Lower valued cuts generally hold the market during the winter while middle meats wait their turn as spring and summer turn the corner. The monthly World Agricultural Supply and Demand Estimates report was released earlier this week by USDA. USDA forecasts beef production in 2016 to increase 3.8 percent from 2015 to 24.58 billion pounds which has resulted in a finished steer price projection 7.3 percent lower than 2015.
Pork production and broiler production are forecast to increase 2.2 and 2.5 percent respectively while turkey production is expected to increase 5.6 percent in 2016 compared to 2015. The increased meat production is expected to soften prices across the board which will place considerable pressure on the beef sector. Beef imports have appeared to slow in January which is consistent with the WASDE report expecting imports to decline 15.6 percent year-over-year while exports are expected to increase 7 percent from 2015 to 2016.
OUTLOOK: As soon as the word steady is mentioned, cattle markets find a way to increase volatility once again. Many of the feeder cattle futures contracts have lost $7 to $8 since the close on February 3rd. The one positive note is that not all classes of feeder cattle are witnessing the same magnitude of price decline. On Tennessee auctions this week, steer prices declined $2 to $7 per hundredweight compared to the previous week while heifer prices declined $2 to $3.
The price decline has many stocker producers being skeptical about purchasing animals as it would appear difficult to pencil a profit on cattle bought today. A 550 pound steer would have cost a producer $945 per head this week on Tennessee auctions while a 650 pound steer would have cost $1,014 per head. If we considered growing those animals to 850 pounds at a rate of 2 pounds per day then the 650 pound steer would be ready for sale towards the end of May while the 550 pound steer could be marketed towards the end of July.
Assuming a negative $10 basis relative to the futures price for those respective marketing time periods then the 550 pound steer has an expected value of gain of 78.5 cents per pound while the 650 pound steer has a value of gain of 83.75 cents per pound.
At first glance those numbers do not look extremely promising, but the key determinant is the cost of gain. Many of the producers that will soon be in the market for stocker calves will be looking for grass cattle which should present a low cost of gain and thus a small but positive profit margin.
If purchased feeds are being used to grow the cattle then margins may be too tight to justify purchase. However, it appears the market is undervaluing feeder cattle in the deferred contract months which means there may actually be more margin with these cattle than the current market is suggesting.
Therefore, the market may be offering a fairly decent purchasing opportunity at this time. It is always difficult to tell when to buy and sell, but if purchasing cattle is in the near future then today is likely to be just as good as tomorrow for the next couple of weeks.
ASK ANDREW, TN THINK TANK: This week, while in San Antonio, a question concerning purchasing steers or heifers for stocker cattle was asked of me. Which one should we buy? The answer to the question really depends on what risk a producer is more willing to take. Steers have a higher initial investment than heifers, but heifers have the potential of being bred. If there is not enough capital to purchase steers then heifers may be the best alternative. If a producer does not want to run the risk of a 650 pound heifer trying to calve then steers may be the best option. If a producer does not want either one of those risks then purchasing bull calves may be the best option but then there are risks associated with castrating those animals. It is six one way and half a dozen another but they are all realized risk.
Please send questions and comments to firstname.lastname@example.org 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 –February $130.00 -0.13; April $129.15 -0.38; June $119.63 -0.35; Feeder cattle - March $150.45 0.20; April $149.98 0.13; May $149.20 -0.18; August $149.58 -0.45; March corn closed at $3.59 down $0.02 from Thursday.