HUNTIN' DAYLIGHT -- ADDING OPPORTUNITY AND RISK WITHOUT WEIGHT

by: Wes Ishmael

“When feeder cattle markets are in balance, prices for lighter-weight feeder cattle adjust to account for the cost of gain to put the additional weight on those cattle such that feedlots are relatively indifferent to buying feeder cattle of various weights,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his weekly market comments the first week of November.

“This is what we observe on average most of the time. Sometimes, anomalies will develop in feeder markets which create different incentives for producers.”

This is one of those times.

“In January of 2015, when markets were near their peak we had a difference of nearly $100/cwt. between cattle weighing 400-500 lbs. and cattle weighing 800-900 lbs., while last week that difference narrowed to about $20/cwt. for the same weight ranges,” explained Brian Williams, livestock economist at Mississippi State University, in the Nov. 7 issue of In the Cattle Markets (ICM). “Even when we factor in the lower prices in general, we have gone from a 50 percent price differential in early 2015 to an 18 percent price differential last week when compared to nearby feeder futures prices.”

“It is very clear that feedlots are placing a large risk premium against lighter feeder cattle,” Peel explained at the end of October. “It could be that feedlots simply don't want lighter-weight cattle because there is an ample supply of heavy feeders which they often prefer to feed. However, the year-over- year decrease in September feedlot placements and the fact that feedlot inventories are barely one percent above last year, despite the fact that there lots more feeder cattle, would suggest that feedlots are not attempting to grow feedlot numbers very fast.”

To illustrate the point, Peel shared an example from the week of Oct. 21: steers weighing 826 lbs. (average of federally reported Oklahoma Auctions, Medium and Large #1) had an average prices of $121.59/cwt.

Marketing Pounds Now or Later

“Given that price, and assuming that feedlot cost of gain is $0.70/lb., feedlots could pay as much as $141/cwt. for a 600-lb. steer,” Peel explained. “However, the average price for 600-lb. steers last week in Oklahoma was $119.78/cwt. In fact, the price of 550-600-lb. steers was less per pound than all heavier animals up to 850 lbs. There was less than $2/cwt. difference in prices for steers from 600 to 850 lbs.

The point is, according to Peel, the market is encouraging cattle to stay in the country longer and come to the feedlot later.

“While it still may have been ideal for cow-calf producers to have sold their calves back in late August/early September before prices came tumbling down, many producers were not able to take advantage,” Williams explains. “The next best alternative may be to place a hedge or a put option to manage downside price risk and hold onto the cattle through the winter to take advantage of the narrowing price slide.”

Considering the lighter auction receipts through the first week of November, along with fewer year-to-year feedlot placements, more cow-calf producers are delaying marketing, at least for now.

“Calf and stocker prices this fall have been sharply undervalued relative to heavy feeder cattle because stocker demand has not yet kicked in to replace weak feedlot demand for these lighter cattle,” Peel explains. “For cow-calf producers with calves to sell, the same signals suggest that retaining calves for stocker or backgrounding should be evaluated. Certainly, pushing lots of calves into a yearling market next year has risks and means that conditions have to be monitored carefully going forward, but the big market signal is clear: there is a need to slow cattle down and spread them out over time and that provides opportunities in the country.”

In the meantime, Williams says a broader implication of the narrowing prices across calf and feeder weights could be a short-term boost to calf prices overall as cattle feeders compete for fewer cattle than they expected, as more cow-calf producers hold on to calves.

“This is likely one of the primary drivers of the temporary bull market that we have seen over the last couple of weeks,” Williams explains. “But, as Stephen Koontz (agricultural economist at Colorado State University) said in the previous week's ICM, the fundamentals are still bearish in the long term, making risk management a major key for anyone thinking of buying/retaining cattle through the winter.”

Heading into Next Year

“There continues to be a wide variation of opinions about the cattle market in 2017,” says Chris Hurt, agricultural economist at Purdue University, in the Nov. 7 Weekly Outlook: Cattle Prices, More Room for Recovery? “Cash cattle prices have recovered about $7 in the past three weeks. Futures prices also recovered. However, futures traders remain far more pessimistic than the current fundamentals seem to suggest. Using futures prices on November 7 as a proxy for cash prices suggest 2017 finished cattle would average in the higher $90's. USDA analysts who use fundamental price models are forecasting the average finished cattle price to be $112 to $121. The mid-point of their forecast range is $116.50/cwt., which is more consistent with current supply and demand expectations.”

One of the keys to price wonderment is the growing supply of beef and other livestock protein.

“In calendar year 2016, U.S. total red meat production will increase about 3.4 percent compared to 2015,” say analysts with the Livestock Marketing Information Center. “Looking ahead to 2017 and 2018, forecasts call for more year-over-year increases. Next year, beef production may increase four to five percent year-over-year, while pork output rises up to three percent.

Along the way, retail beef prices should continue adjusting to lower wholesale beef values, albeit slowly.

“Into 2017, retail beef prices will likely continue to decrease and marketing margins will likely decrease with a greater share of the retail beef dollar getting back to the cattle price,” Hurt says. “While it is difficult to accurately predict how large this impact will be, it seems within reason to expect about an $8 to $12 improvement in finished cattle prices just based on narrowing marketing margins in 2017.”

Hurt adds that international trade should add support to cattle prices next year.

“As U.S. beef prices come down in 2017 there will be less beef imports and more beef exports. USDA's current projections are for 11 percent less beef imports and a six percent rise in beef exports,” Hurt explains. “Even though U.S. beef production could be up three to four percent in 2017, the positive impacts of trade mean that per capita beef supplies in the U.S. may only rise less than one percent if demand stays similar, 2017 finished cattle prices would be expected to be modestly lower than this year's $118 to $120.”







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