A dollar per pound.
A hundred bucks per hundredweight.
The week of April 10 prices for fed cattle across the nation—217,000 head—charged to and a little past that magical century mark. A couple of weeks earlier, some in the northern region did. Since then, prices have retreated a few dollars but are expected to see $100 again this spring.
Spun differently, fed cattle prices the first week of April were running $17-$20/cwt. more than the same period in 2006. Calves were selling at about the same level as the year prior, while yearlings were up $5-$10, according to the Agricultural Marketing Service.
You could see the upswing in fed cattle prices coming, but the degree to which supply fundamentals can push the market is always amazing. The full effects of continuing year-to-year declines in carcass weights due to blizzard-losses and high grain prices are finally coming to the fore.
At the annual meeting of the Texas and Southwest Cattle Raisers Association (TSCRA) April 1, Randy Blach, Cattle-Fax executive vice president pointed out average carcass weights increased 12 lbs. per carcass for the past two years. That was the equivalent of adding two percent more beef production each of those years. This year, between the winter and corn prices, carcass weights are declining.
So, at about the same level of demand there just isn't as much supply. Retailers fearing tighter supplies later this spring have been pushing boxed beef prices
Analysts with the Livestock Marketing Information Center (LMIC) point out cash market prices on a daily basis haven't approached the record highs achieved in the last quarter of 2003.
In October that year steers reached $113.83, based on the five-market average used by the National Agricultural Statistics Service; $116.94 for steers grading better than 65-80 percent Choice. The fourth quarter average that year was $97.57. That was back when BSE pulled Canadian cattle from the international export market, and before U.S. cattle suffered the same fate.
“On an annual basis, record high fed steer prices occurred in 2006; the 5-market average for steers was $85.94,” says LMIC. “This year current forecasts call for new record high annual average slaughter steer prices. For the year, steers could average about $90, up about 5 percent from last year. But setting new record high daily cash levels will not occur without some additional spark. Setting a new record high quarterly average fed cattle price might happen in 2007 and is even more likely in 2008.”
The more cynical in the crowd might view this period of cattle history like the nation's Roaring 20's ushering in the Great Depression. The logic being that cowherd expansion, coupled with record high breakeven prices—courtesy of corn—and slipping domestic demand will spawn a gargantuan downturn in the calf and feeder markets.
Aligning the Stars
As always, domestic beef demand is key. It has pushed cattle prices into the new price plateau enjoyed by producers. Going the other way, it could certainly crash the party. The fact is, through the end of 2006, as measured by the industry's retail beef demand index (BDI), domestic demand has slipped for two straight years.
As for herd expansion, based on cow slaughter so far this year there are plenty of reasons to believe there will be little if any expansion in 2007. That means, even if grain prices and breakevens continue to escalate, feedlots will likely be limited in how much they can take off feeder prices.
Corn is even more of a wild card than usual because of ethanol wonderments and some of slimmest year-to-year carryovers in years.
On the one hand, USDA's initial report of planting intentions released March 30 estimates that producers will plant 95.5 million acres of corn this year. That's 15 percent more than last year and the most since 1945.
Iowa and Illinois which churn out the most corn each year each are adding over one million acres of corn for totals of 13.9 million acres and 12.9 million acres, respectively. According to the report, producers in Nebraska and North Dakota are also aiming to plant approximately 1 million more acres.
Much of the increased corn planting, as expected, is coming from soybean ground. According to the report, producers intend to plant 67.1 million acres of soybeans, 11.1 percent less than last year.
Cotton planting is expected to decline 20 percent to 20.1 million acres.
All wheat plantings are estimated to increase five percent to 60.3 million acres. Of that, 44.5 million acres of winter wheat reflects 10 percent more.
Incidentally, if results of a recent survey by USDA are correct, 84.4 percent of the acres currently enrolled in CRP—with contracts set to expire between 2007 and 2010—will be re-enrolled. These contracts account for approximately 27.8 million acres.
More specifically, participants indicate they will pull about 4.6 million acres out of CRP. Of these, approximately 1.4 million acres are located in major corn producing states, according to USDA.
Of course, acres planted say nothing about the crop.
The last several corn crops have been records, yet carry-over has remained razor-thin. Given the added demand from ethanol, less than expected corn production at this stage of the game could drive corn prices so far and fast that feeding cattle would make sense only if those cattle were discounted drastically heading into the yard compared to today's prices.
This is true even though the bloom has already been fading from the rose of domestic ethanol expansion.
The Food and Agricultural Policy Research Institute looks for ethanol prices to continue dropping through this decade—presumably the result of production outpacing demand. .
Then there's the whole logistics puzzle. According to Roger Ginder at Iowa State University last fall, grain storage in Iowa would have to double from what it is currently over the next several years to meet the expected increased production by 2010; corn takes up more space than the soybeans additional acres of corn are expected to replace. That's just grain storage and in one state. Ginder goes on to mention the impending bottleneck in rail and highway trucking capacity.
Bill Holbrook from Exporter Network—a grain market analysis firm—told folks at the TSCRA meeting that some of the larger ethanol players are already putting some of their new-construction plans on hold; capitol costs of construction are increasing 1.0-1.5 percent per month, while profit expectations decline.
None of this is saying ethanol isn't changing the cattle business—it will and it already has—considering how many dollars have been shucked from calf prices. Those prices are still among the highest in history, but given the supply fundamentals, they'd be higher if it wasn't for ethanol subsidies pushing up breakevens.
Still, it seems a stretch to expect ethanol production to grow as fast as some suggest. It seems just as iffy that Bush's goal for 35 billion gallons of alternative liquid fuel by 2017 will be achieved.
That brings us to the calves. Speculation and odds favor the fact that in order to combat the sky-high breakevens associated with calf-feds, feedlots will be looking to bring cattle into the yards with more weight on them.
According to the annual Focus on Feedlots survey from Kansas State University steers were on feed an average 158 days in 2006 which was about seven days longer than in 2005, while heifers were on feed an average two days more at 152 days.
“Feedlots reported the cost of gain for steers in 2006 at $53.94 per hundredweight, only $0.83 per hundredweight higher than in 2005 but $3.52 per hundredweight higher than the 2001-2005 average,” says the report. “Heifers closed out at an average $57.10 (cwt.), $1.40 per cwt. higher than 2005's average. For 2006, feedlots reported an average corn price of $2.77 per bushel, only $0.33 per bushel higher than 2005's average as prices did not surpass the $3 per bushel mark until late in the year. Alfalfa hay at an average $109.39 per ton in 2006 was the highest annual price reported thus far in the survey (began in 1992). Compared to 2005, hay prices in 2006 were over $33 per ton higher and were nearing $140 per ton in December.”
There's also reason to believe feedlots will seek to take ownership of cattle ahead of the feedlot sooner in order to dilute the added losses that come with the lower average occupancy rate that results from having cattle on feed for fewer days.
Bottom line, as excess cattle feeding capacity and beef packing capacity continue to chase limited cattle numbers, there's every reason to believe the market will retain plenty of steam.