HUNTIN' DAYLIGHT -- DEMAND-AGGRESSIVE MARKETING BUOY CATTLE PRICES

by: Wes Ishmael

Cattle numbers continue to grow with national cowherd expansion, and various data suggest herd expansion is continuing this year.

“It looks like we're still growing the cowherd to some extent,” explained Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, during the recent annual Beef Stocker Field Day at Kansas State University. He expects growth of one to two percent this year, then flat to minimal growth in 2018.

Although heifer slaughter is increasing, Peel says the steer-to-heifer slaughter ratio suggests slowing herd growth but certainly not liquidation.

Similarly, in their recent Long-term Beef and Cattle Outlook RaboBank analysts see the U.S. beef cowherd expanding 1.6 percent to 2.2 percent over the next two or three years. Beef production will last longer as the herd moves into the next liquidation phase.

As it is, analysts with USDA's Economic Research Service (ERS) note in the most recent monthly Livestock, Dairy and Poultry Outlook that forecast beef production this year is 26.6 billion lbs. That's the most in about a decade.

Yet, calf and feeder cattle prices continue to be significantly higher year over year. For example, the last week of September, calf and feeder cattle prices in the Southeast were 23-26 percent higher year over year in the National Weekly Feeder and Stocker Cattle Summary.

Feedlot Marketing Mostly Offsets Placements

“There remain a large number of cattle on feed, but timely marketing the past 12 months has kept cattle current and the risk of a wall of cattle pushed to the sidelines,” says Andrew P. Griffith, agricultural economist at the University of Tennessee, in his late-September market comments. “Cattle feeders have continued to purchase feeder cattle aggressively with the expectation of prices improving moving forward.”

“What may be overlooked is the continued strong marketings pace,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his market comments the same week. He was referencing the September Cattle on Feed report that indicated more placements of feedlot cattle in August than many were expecting.

“Marketings outpaced placements in August and pulled down the year-over-year increase in feedlot inventories, though not as much as expected,” Peel explained. “For the first eight months of the year, total placements are up 1.16 million head, an 8.4 percent year-over-year increase. However, total marketings were up 0.847 million head, 6.1 percent more than last year, largely offsetting the increased placements. As a result the September 1 on-feed inventory was up a modest 369,000 head year over year.”

Plus, Peel notes that lighter carcass weights and continued strength in beef demand are offsetting some of the impact of increasing numbers and beef production.

For the year to date, steers carcasses have averaged 14.1 lbs. lower than last year, according to Peel. Heifer carcasses are 12.3 lbs. lighter.

The August Choice beef price (retail, $5.94/lb.) was nearly one percent more than August of last year, Peel says. The all-fresh beef retail price was fractionally higher than one year ago.

“Clearly the supply challenges will continue for the foreseeable future,” Peel says. “However, 2017 has demonstrated very well that strong domestic and international demand for U.S. beef can mitigate much of the price pressure from growing beef production. Continued strong beef demand can limit 2018 cattle and beef price changes to modest declines.”

Demand Stronger than Expected

Depending on how you measure, so far this year, domestic consumer beef demand has been stronger compared to last year.

“The June 2017 index of 113 (grocery store demand) indicates retail beef prices in June were 13 percent higher than they would have been had demand not improved since January 2011,” says Glynn Tonsor, agricultural economist at Kansas State University. “Given this index was 101 for November of 2016, sizeable demand improvement over the seven months captured in this update is evident.”

Tonsor is referring to nine updated beef demand retail indexes recommended to the Cattlemen's Beef Board. They include an overall reading on grocery store beef demand, as well as category-specific and region-specific indexes. Tonsor and fellow KSU agricultural economist, Ted Schroeder, developed the indexes for industry consideration with funding from the beef checkoff.

You'll note that observed gains in demand run counter to commonly used industry beef demand indexes that rely on aggregate data. For instance, according to the All-fresh Beef Demand Index (AFBI) maintained by Tonsor, beef demand declined in the first two quarters compared to a year earlier. The same for the Choice Beef Demand Index (CBI).

This paradox underscores the need for the new indexes.

In broad terms, Tonsor explains that aggregate data utilized in traditional beef demand indexes like the AFBI and CBI rely on beef disappearance data—retail and food service—from USDA and prices reported by the U.S. Bureau of Labor Statistics—the same folks who track prices and provide the Consumer Price Index. In other words, such indexes cannot account for actual prices paid, regional differences, etc.

Conversely, the updated indexes utilize grocery store scanner data—actual prices paid at retail for specific beef cuts and packages.

International demand for U.S. beef continues to be significantly more robust than last year, too. Keep in mind that demand last year was strong and growing.

The value of U.S. beef exports in July (most recent data available) was among the highest monthly totals on record at $623.7 million. It was 18 percent more than a year earlier with volume five percent more at 104,488 metric tons. Export value per head of fed slaughter averaged $299.21 in July, up more than $35 (13 percent) from a year earlier. Through July, per-head export value this year was up nine percent to $273.52.

Calves Face Seasonal Pressure, But…

None of this means calf prices are immune to seasonal declines as the fall run begins. However, it all suggests that prices should remain higher year over year.

“It appears strong demand will continue for calves that will be placed on grass in stocker operations, but that will not keep prices from softening in October and November,” Griffith said. “It is safe to say calf prices are as strong as can be expected for the time of year considering 525 lbs. steers averaged $750 per head on Tennessee auctions this week (Sept. 29). However, as the market moves into October and November, it is possible for 525 lbs. steer values to drop closer to $700 per head. Given the declining market, producers should sharpen the pencil and start calculating cost of gain versus value of gain to see if a few more dollars can be squeezed out of each head. Additionally, producers should consider alternative marketing opportunities.”

Some folks have a natural intuition when it comes to identifying value in the marketplace, what to buy and when to sell to the greatest economic advantage. They might not run through any particular equations with a pencil and paper, but I'm betting that intuition is informed by understanding the value of gain Griffith mentions.

Figuring out how much the market is offering for adding pounds—the value of gain—is straightforward: the difference between purchase and projected sale price divided by the difference in projected sale weight and purchase weight (the total pounds of gain).

Suppose the estimated value of gain is 85¢ per pound or $85/cwt. for 200 lbs. of added weight. Supposing the cost of gain is 65¢, the potential gross return for adding the value in this example is $20/cwt. or $40 per head. Obviously, the outcome shifts as value of gain and cost of gain fluctuate. Moreover, the estimated return may or may not offer enough economic incentive for someone to assume the risk of extended ownership. The point is that there are always marketing alternatives.

“Buyer interest in preconditioned calves is expected to continue to grow as increases are realized in calf prices and the cost to finish cattle,” says Brenda Boetel, Extension economist at the University of Wisconsin-River Falls, in a recent issue of In the Cattle markets. “In the current environment, preconditioning may become even more important, not necessarily due to the premium received for preconditioning, but because the cow-calf producer can avoid the discount received for calves with the unknown health status of non-preconditioned calves.”

Last fall's wreck comes to mind: it was difficult to peddle un-weaned calves for any price.

With that said, Boetel explains there's lots to consider in deciding whether or not it makes economic sense to keep calves a spell.






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