HUNTIN' DAYLIGHT -- SLOW GO

by: Wes Ishmael

By now, dwindling cattle supplies were supposed to be pushing prices into the ballpark of profitability. Instead, the wide-spread, lengthy pre-spring weather and continued losses in the feedlot sector have stalled the promise.

“The steady decline in feeder cattle prices since the beginning of the year reflects the simple fact that cattle feeders have been losing money—lots of it,” said John D. Anderson, deputy chief economist of the American Farm Bureau Federation in an April issue of In the Cattle Markets. “Calf prices last fall reflected expectations of sharply higher fed cattle prices this year as supplies tightened and prices rose in response. Supplies may have tightened, but prices haven't done too much rising. The 5-Area weekly weighted average fed steer price worked out to $128.12 in the first week of 2013. It has exceeded that level exactly once since then…With cost of gain in the vicinity of $1.25/lb. and fed cattle prices of $125/cwt., feeder cattle that went on feed at $145 or better don't work out too well…Cattle feeders are increasingly unwilling and/or unable to pay up for calves while betting on a stronger fed cattle market down the road…”

Though value of gain offers potential for stocker operations, they have been slow entering the summer grass market this year as atypically cool temperatures delayed forage growth. The subsequently shortened grazing season will likely alter participation for some.

From a futures price perspective, the weather is also adding volatility with the corn market. Early on, planting intentions indicated corn farmers intended to plant the second-most acres in history. With typical weather and yield that would make for a record corn crop, desperately needed to increase razor-thin stocks and take a whack out of stratospheric prices.

Wet weather was delaying planting. As of April 22, according to USDA's weekly Crop Progress report, four percent of the crop was in the ground, compared to the five-year average of 16 percent and the phenomenal 26 percent a year ago.

“Northern states like North Dakota which were key corn producers in 2012 currently are faced with much different conditions including deep snow cover and prospects for flooding,” analysts with the Livestock Marketing Information Center (LMIC) explain. “Producers in North Dakota reported to USDA intentions to plant 4.1 million acres, 500,000 more than last year. In 2012, corn plantings in North Dakota surged, jumping to over one million acres compared to 2011's.”

LMIC has already reduced its corn acreage estimate for this crop-year by 400,000 acres due to what appear to be unavoidable weather-related planting problems.

Those same cool temperatures have been blamed for keeping consumers away from the backyard grill at a time of the year when demand usually picks up. Weekly boxed beef trade continues to be significantly less than a year ago. What's more, the price of beef relative to other meats continues to widen, placing more pressure on consumer demand.

“Slow recent rates of CPI (Consumer Price Index) growth indicate meats and dairy products have some strong domestic headwinds to face moving forward,” say LMIC analysts. “Retail meat cuts could struggle against consumer price push-back particularly in the beef complex.”

LMIC analysts explain post-recession meat price gains have slowed, especially since early 2012.

“Poultry, on the other hand, has had much steadier gains and has not shown signs of slowing,” LMIC analysts say. “The trend line from the lowest point indicates the CPI poultry category adds 0.75 points every month and is currently only 5.6 points behind meats at 227.5, narrowing their long term price discount to meats.”

The April World Agriculture Supply and Demand Estimates (WASDE) decreased projected beef production slightly for the remainder of 2013 and left unchanged the projected annual price average for fed steers at $125-$132/cwt. The third-quarter estimated average is $125-$135/cwt.; $127-$137/cwt. for the fourth quarter.

At the same time, forecast hog prices were lowered on increased inventories and expected decreases in exports for the year. Broiler prices were estimated higher based on what is termed robust demand.

Export Headwinds

Although U.S. beef exports remain positive, trade barriers and international economic obstacles are beginning to take a toll, too.

Exports to Japan were expected to increase significantly when that nation expanded the age of cattle producing U.S. beef imports from 20 months to 30 months. But, Tim Petry, livestock economist at North Dakota State University, explained in another issue of In the Cattle Markets, “In the last several months the U.S. dollar has increased about 20 percent relative to the Yen, which causes U.S. beef that is at historically high price levels to even be higher priced. Furthermore, the Bank of Japan announced (April 4) a major monetary stimulus plan to inject about $1.4 trillion into the economy in the next two years. That goal to achieve two percent inflation sent the Yen plummeting.”

According to the U.S. Meat Export Federation (UMSEF), the ractopamine impasse with Russia has had a dramatic impact on this year's export results. After record exports there last year, beef exports to Russia through February were 82 percent less in tonnage and 94 percent less in value. The downturn in beef exports to Russia more than accounted for the overall volume decline in February.

If you're unfamiliar with the aforementioned impasse, Petry explains that earlier this year Russia announced that it was banning all beef, pork, and turkey from the U.S. unless it could be certified free of ractopamine (a beta agonists that promotes muscle growth).

“Since the U.S. does not have a ractopamine-free certification process, beef exports to Russia have stopped,” Petry says. “Beef exports to Russia have been gradually increasing the last several years. In 2012, Russia was the 6th leading destination for U.S. beef which amounted to over six percent of beef exports.”

According to USMEF, beef export value in February averaged $239 per head of fed slaughter – up nearly $31 from a year ago. This drove the January-February export value to $220.39 per head, compared to $202.89 in 2012. The percentage of U.S. beef production exported in February was 10 percent for muscle cuts and 13.4 for combined muscle cuts and variety meat. This compares to last year's tally of 9 percent and 12.6 percent, respectively.

Demand Troubles

Beef's price struggles also speak to a U.S. economy that continues to play chicken with itself. Well heeled investors may be padding their portfolios amid the bullish Wall Street rally, but we common folks continue slugging it out in the trenches.

Earlier this spring, John Michael Riley, agricultural economist at Mississippi State University explained the primary reason beef prices declined was loss of the Social Security tax break (two percent) consumers enjoyed last year.

“Using the median household income in 2011 of $50,054 as a gauge for current levels, this results in a $1,001 decrease from the family budget or about $83 per month,” Riley said in a February issue of In the Cattle Markets. “While this may not sound like a substantial decrease, when carried across all households, it does add up. A second factor is that the costs of other items in the family budget are increasing. Gasoline prices, for example, increased seven percent in the first month of 2013…The price of beef coming into 2013 left some consumers priced out of the market. Since the amount of beef produced must equal the amount consumed, given that beef is perishable, this has forced the price of beef lower via a decrease in beef demand.”

For the record, beef demand itself continues to remain surprisingly strong, but quantity demanded has declined in response to prices driven higher by tighter supplies.

All of this is with a national beef cow herd that shows signs of decreasing for yet another year.

“There is growing evidence that extended cold weather has increased beef cow liquidation,” says Derrell Peel, extension livestock marketing specialist at Oklahoma State University in his April 22 weekly market comments. “Total beef cow slaughter has been up 11.1 percent the last four weeks after declining early in the year. Year-to-date beef cow slaughter is now down a scant 3.7 percent from last year…The combination of increased beef cow slaughter and relatively more heifers on feed at this point likely means that any prospects to avoid additional beef herd liquidation in 2013 may already be seriously eroded.”

The April Cattle on Feed report shocked plenty of folks with March placements (1.90 million head) six percent more than a year earlier, compared to the average pre-release survey estimate for a reduction of 0.9 percent.

“These data are nearly inexplicable following another year of deep culling of breeding stock,” analysts with the Agricultural Marketing Service explained that week. “But, forage availability of any kind has been very tight and the placement value from a year ago was very low at 93.6 percent of 2011. However, feeder cattle indeed continue to come out of the woodwork with nationwide auction receipts surprisingly heavy so far this month…”

These and other factors currently yield continued hope in higher prices spawned by historically low cattle numbers, as well as the reality of potential further market pressure and liquidation.

In the April USDA Livestock, Dairy and Poultry Outlook, analysts with the Economic Research Service (ERS) explained, “If corn prices decline as forecast (as a result of more normal precipitation) and pasture conditions improve, prices for feeder cattle could receive an additional boost. Any positive feeder cattle price effects would likely continue to accrue to the lighter weight cattle, which have a higher potential for marketing as fed cattle extending well into the 2013-14 corn-marketing year, when corn prices are anticipated to be significantly lower. These cattle will likely have the first real potential to generate cattle feeding profits since early 2011, provided anticipated increases in feeder cattle prices do not fully offset anticipated declines in corn prices and fed cattle prices do not deteriorate significantly.”

On the other hand, ERS analysts explain, “Continued drought could again force feeder cattle into feedlots prematurely. These premature placements would likely increase beef supplies during the latter part of 2013 and into 2014. Increased supplies would likely exert downward pressure on fed cattle prices, which, along with increased feeding costs from longer feeding periods—required by lighter weight placements—would likely reduce cattle feeding profit potential.”







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