Market Highlights: Undervalued Cattle Making Comeback

October 20, 2015 11:25 AM
 
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By: Andrew P. Griffith, University of Tennessee

FED CATTLE: Fed cattle trade was not well established at press. Asking prices in the South were around $135 while asking prices in the North were $208. The 5-area weighted average prices thru Thursday were $123.20 live, up $4.68 from last week and $198.56 dressed, up $8.56 from a week ago. A year ago prices were $163.74 live and $257.75 dressed.

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The upswing in the cash market and the futures market last week is witnessing some follow through this week. The only slowdown is that packers are extremely hesitant to pay higher prices. It is understandable to be hesitant or even resistant considering asking prices in the South and North are $8 to $9 higher than last week’s price.

The feedlot is who has been losing money as of late, but the packer is not ready to relinquish the margins that continue to pay the bills. It appears the feedlot manager and the packer will be pulling rope the next few weeks to see who can acquire the best deal. There may be tough times ahead until holiday buying begins to support prices in November and December.

BEEF CUTOUT: At midday Friday, the Choice cutout was $211.21 down $0.01 from Thursday and up $8.24 from last Friday. The Select cutout was $197.93 down $1.06 from Thursday and up $8.24 from last Friday. The Choice Select spread was $5.04 compared to $5.04 a week ago.

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Just as the Select cutout fell below the $200 mark and the Choice cutout was approaching the same, the beef cutout prices turned on their heels and experienced large gains this week. There are concerns about the domestic market, the export market, the value of the dollar, and competing meat prices which all impact the demand side of the equation.

Demand concerns are viable and impact the price of beef and thus the price of cattle. However, the fundamentals of the market are not much different from one year ago.

There is still a smaller quantity of beef production due to the relatively small cow herd. The relatively low production will continue to support prices the next couple of years. There will be a slow erosion in wholesale beef prices as well as retail beef prices as the cow herd grows and as beef production increases.

The Choice and Select cutout prices will likely be sub $200 once the supply side of the equation significantly changes. The supply side is the primary driver of where the market has been the past couple of years.

OUTLOOK: The first thing to remember with most agricultural markets is that they tend to overreact to good news but even more so to bad news. The cattle industry is not immune to these overreactions, and it has been evident with the price swings the past eighteen months.

Most analysts and cattle producers would agree that cattle prices last fall exceeded expectations and thus were higher than what the fundamentals of supply and demand would have warranted with perfect information. But, part of the allure to the cattle business and agriculture in general is the risk that is incurred due to the lack of perfect information.

Imperfect information in the market is a large part of why cattle prices witness rather large swings. So, prices exceeded expectations during the last half of 2014 and continued to do so the first half of 2015, but prices started a steady decline from the back half of June through August before dropping like a rock through last week.

The price decline has been fueled by extremely heavy finished cattle which depressed fed cattle price and thus feeder cattle prices. There is also some uncertainty about how many feeder cattle are still out in the country and how heavy those entering the feedlot over 800 pounds really are. Now that there is some indication the front end of the heavy cattle have been harvested, the fed cattle market and the feeder cattle market have regained some life. Most analysts and producers would say that feeder cattle and finished cattle have been somewhat undervalued the past several weeks which is likely the leading factor of prices making a small resurgence.

Based on the Tennessee weekly auction average steers are up $10 to $14 dollars compared to a week ago while heifer prices increased $6 to $11 over the same time period. There may be some additional upside potential for calf and feeder cattle prices, but it is important to remember that calf prices will be pressured as producers continue to set wheels under freshly weaned lightweight calves. The market will likely try to level out some the next several weeks which should provide buyers and sellers an opportunity to do business. Sellers should not be surprised if calf prices take another dip before gaining more traction.

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ASK ANDREW, TN THINK TANK: 
A question was raised in Decatur County concerning why cattle feeding is concentrated in the Plains States and the Mid-West. First, it is less expensive to haul the cattle to the feed than it is to haul the feed to the cattle. Assuming 6 pounds of feed per pound of gain and 500 pounds of gain in the feedlot then it takes 3,000 pounds of feed per animal. It is less expensive to haul 62 animals weighing 800 pounds to the corn than it is to haul 186,000 pounds of corn to the truckload of animals. Transportation cost of an animal is about 25 percent of what hauling the feed would cost. Second, the harvest facilities are located in those regions. Then the question arises about why Texas feeds cattle but does not produce much corn. The cattle in the South are largely ‘ear cattle’ and are good at handling high temperatures. What they are not so good at is handling cold temperatures which results in poor performance and sometimes death in northern feedlots. Thus, they are kept in moderate climates for production purposes.

Please send questions and comments to agriff14@utk.edu 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 $135.95 3.00; December $139.55 3.00; February $141.58 3.00; Feeder cattle - October $193.63 3.85; November $190.00 4.10; January $182.23 3.03; March $179.50 3.05; December corn closed at $3.77 up $0.01 from Thursday.

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dave
linn, MO
10/20/2015 09:10 PM
 

  Manipulated cattle market coming back!

 
 

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