HUNTIN' DAYLIGHT -- FUNDAMENTALS REMAIN STRONG AT MID-YEAR

by: Wes Ishmael

“There is no guarantee prices will remain this strong, but there is also no information suggesting prices should decline,” says Andrew P. Griffith, agricultural economist at the University of Tennessee in his early-June market comments.

That simple statement says lots to anyone who cares to ponder.

There are still plenty of folks waiting for the other boot to drop on the prolonged cattle market rally. After all, it's human nature to kill off next year's grain crop a few times before the seed is ever sown. Lots can happen, but the fact is, fundamentals remain strong, thanks in large part to cattle feeders taking advantage of the wide basis between nearby futures and cash prices to keep moving cattle ahead in marketing. That reduced carcass weights significantly more than most anticipated, diluting the impact of increasing cattle numbers.

Consider beef production in the first quarter. It was six percent more than the previous year, according to USDA's Economic Research Service (ERS). That was with 526,000 head more cattle harvested. Yet, beef production for the year was forecast lower than previously expected due to the lighter carcass weights.

“Production was hamstrung by a 10-pound drop in the average dressed weight as fed cattle were marketed at lighter weights and the slaughter mix contained proportionally more heifers and cows,” say ERS analysts in May's Livestock, Dairy and Poultry Outlook. “Although the magnitude of the year-over-year decline in weights is expected to moderate during the year, the average carcass weight for the year is expected to be below earlier levels.”

Along the way, consumer beef demand remains more robust in this country and abroad than many anticipated.

“It has been a spectacular rally for the producer in the fat cattle market, driven by packer competition in order to meet sold-ahead positions in meat sales for domestic and export commitments,” explained analysts with the Agricultural Marketing Service in mid-May. “The cutout moved significantly higher to compensate for the higher fat cattle market gaining nearly $40 on Choice product since the first of April, and with a $20 Choice-Select spread as so many green cattle are being pulled forward.”

As cattle feeders pull cattle forward, there are relatively fewer Choice-grading cattle, while consumers so far are clamoring for more, as evidenced by the historically high Choice-Select spread.

For perspective, the monthly daily average Choice-Select spread in the first quarter of this year ranged from $2.22 to $7.08/cwt. this year, compared to a range of $4.18 to $5.90 through the first quarter of last year. It was $2.54 higher year to year in April at $11.97. By the end of May it was running beyond $25.

The seasonal trend is no surprise, but the degree of climb is atypical.

“Over a 12-month period of time, the Choice-Select spread is typically narrowest in the January to March timeframe as the demand for Choice graded middle meats is at its lowest and the supply of Choice graded cattle is typically at its highest,” explains Brenda Boetel, an agricultural economist at the University of Wisconsin-River Falls, in a recent issue of In the Cattle Markets. “As we go into summer, the demand for Choice graded middle meats is higher as retailers fill shelves in anticipation of the grilling season, but the supply of Choice graded cattle is lower as we see more calf-fed cattle being harvested.”

This year, Boetel says the spread widened earlier than normal as demand for Choice ran ahead of supply, even though the percentage of Choice-grading cattle is two percent higher year to date.

“Likely one reason for the increased demand for Choice quality beef is the overall decline in retail beef prices,” Boetel says. “On average, fresh retail beef prices declined five percent over the same period in 2016. This overall decline in beef prices allows consumers to potentially switch from Select quality beef to Choice quality beef while not paying substantially more for a better product.”

Prices Ahead

“Expectations are that prices (fed cattle) will remain relatively strong, despite declining from recent peaks, as packers maintain relatively high rates of cattle slaughter to mitigate the effects of lower carcass weights,” say ERS analysts.

Demand for market-ready cattle boosted the 5-Area Direct steer price in April to $131.31/cwt., well above the first-quarter estimate of $122.96, according to ERS. The second-quarter price is projected at $127-$133, reflecting strong prices through early May.

“Feeder steer prices have benefited from increased fed cattle prices, averaging $139.27/cwt. for April,” ERS analysts say. “Feedlots saw returns strengthen on higher fed cattle prices and relatively cheap feeders purchased two quarters earlier. However, feedlot operators could face declining returns if fed cattle prices decline with increased supplies of cattle in the second half of the year. To the extent that declining fed cattle prices squeeze feeders' margins, feedlot operators may opt to keep cattle on feed longer in an attempt to push bids higher. The result would be increasing average dressed weights.”

Internationally, both supply and demand are boosting the fortunes of U.S. beef.

“The U.S. is not just moving more meat internationally because we have more available. Our products are commanding solid prices and winning back market share in many key destinations, even with a strong U.S. dollar and many trade barriers still in place,” says Philip Seng, president and CEO of the U.S. Meat Export Federation (USMEF). “But our competitors are working every day to reverse this trend, so we must aggressively expand and defend our international customer base.”

U.S. beef exports were 18 percent higher in March compared to last year and value was up 22 percent at $588.2 million. First-quarter beef exports were up one percent in volume and 19 percent in value at $1.61 billion. Export value per head of fed slaughter averaged $270.14 in March, up 11 percent from a year ago, while the first-quarter average increased 10 percent to $267.71 per head.

Moving forward, U.S. beef exports could gain significantly if the doors to China open as promised. On the other end of the scale, global beef export prices should be supported by India's recent decision to prohibit the sale of cattle and buffalo for slaughter. India increased beef exports (primarily water buffalo) significantly in recent years and is one of the world's largest beef exporters.

In the meantime, Griffith offers an insightful example of just how well positioned cow-calf producers are positioned currently. In mid-May, he used weekly Tennessee auction prices to consider the potential of preconditioning calves 45 days prior to sale, as well as backgrounding the calves up to 120 days. Specifically, he assumed a steer calf weighing 550 lbs. at $158/cwt. for a gross value of $869 per head.

“Most producers in the state would find the stated revenue from selling a calf straight off the cow to exceed variable costs, but that does not mean it is the most profitable decision,” Griffith explained.

For the preconditioning program with complete vaccination, Griffith assumes the calf gains 90 lbs. over the 45 days. What would then be a steer weighing 640 lbs. has an expected sale price of $150/cwt. or $960. The value of gain is $1.01/lb.

Double the weight gain on a 90-day backgrounding program and the calf weighs 730 lbs. with an expected sale price of $148/cwt. for a total value of $1,080 per head. The value of gain is $1.17/lb.

“There is no guarantee prices will be at the expected levels as prices could be lower or higher than expected,” Griffith says. “The current value of gain appears appetizing as the cost of gain on most operations is sure to be below $1.00 per pound.”

Whether the risk of adding weight to calves is worth the potential reward or loss depends on the unique goals and resources of every individual operation. Griffith's point gets at considering how to market calves rather than sell them in every situation.

“Looking forward to fall marketing of spring-born calves, producers with intentions of marketing calves this fall should consider setting a floor on intended marketings,” Griffith says. “Again, there is no guarantee of which way the price will move, but prices for the fall look very favorable at this point. Doing nothing is a decision, and it sometimes comes with an expensive price tag.”







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