Red Ink Continues for Cattle Feeders
FED CATTLE: Fed cattle traded $3 to $4 lower on a live basis compared to last week. Live prices were mainly $113 to $115 while prices on a dressed basis ranged from $178 to $182. The 5-area weighted average prices thru Thursday were $114.81 live, down $2.73 from last week and $180.38 dressed, down $5.68 from a week ago. A year ago prices were $143.40 live and $226.97 dressed.
Cattle traded fairly early this week and prices just got softer as the week progressed. The weaker futures market had packers on the defensive while feedlot managers had to move cattle out of the pen.
Lower finished cattle prices continue to produce red ink for most cattle feeders which continues to drain equity. The total losses on feeding cattle continue to mount which puts the feeder in a corner.
Lower feeder cattle prices will lower breakeven prices on cattle being placed, but cattle feeders will have to lower bids on feeder cattle as finished cattle prices continue to decline. Cattle feeders have been under financial stress for several months, and that stress is quickly spreading across the industry.
BEEF CUTOUT: At midday Friday, the Choice cutout was $199.73 down $0.63 from Thursday and down $0.42 from last Friday. The Select cutout was $194.03 down $0.12 from Thursday and up $0.03 from last Friday. The Choice Select spread was $5.70 compared to $6.15 a week ago.
There is very little to say about the Choice and Select cutouts. Neither cutout made much of a move this week. There was hope from many in the industry that Labor Day grilling would spur another run-up in wholesale beef prices. At best, Labor Day beef purchases have been able to hold prices at their current level.
Looking forward, wholesale Choice beef prices are going to struggle to beat the $200 mark. It was the week ending May 10 2013 when the Choice beef cutout first eclipsed the $200 level. From the first week of 2014 until now, the weekly Choice cutout price has only fell below the $200 mark in four weeks. It appears this trend is about to change as the fall and winter months along with consumption patterns will pressure beef prices lower.
Packers are not excited about the lower prices which will force them to offer lower prices for finished cattle and thus lower feeder cattle prices. There is a possibility the Choice cutout could fall below the $190 mark before the end of the year which is something that has not happened since August 2013.
OUTLOOK: It is all but guaranteed the summer highs for feeder cattle prices have come and gone. September, feeder cattle future prices experienced a fairly quick ascent gaining more than $15 per hundredweight in less than three weeks from July 21st to August 9th. Since the summer peak, September feeder cattle futures have declined $7.
The price increase was right on time as far as seasonal tendencies are concerned, but it was a little shorter lived than what most producers were expecting. The question now is if prices could turn around after losing for two straight weeks.
From a short-term standpoint, it is difficult to guess the daily market moves which contain a lot of volatility. From a longer-term perspective, producers should be preparing themselves for lower prices this fall on all weights and classes of calves and feeder cattle.
The market will see a lot of calves coming to town in October and November which will pressure prices. The large number of calves and the abundant supply of feeder cattle will result in all weight classes of cattle witnessing price pressure. The price pressure this fall could easily result in 500 to 600 pound freshly weaned steer prices in the mid to upper $120’s.
Similarly, prices for truckload lots (50,000 pounds) of 700 to 900 pound steers could be in the $120 to $130 range. After two years of a roaring market, the bears have marched in and taken the air out of the sails. The direction prices are headed makes it difficult to be profitable in the business. There remain profits for many in the industry, but further price declines will have others subsidizing the cattle operation with off-farm jobs or other enterprises.
These comments are not meant for doom and gloom. However, they are meant to be used for planning purposes. Producers need to be considering changes they can make to reduce costs without negatively impacting production. Additionally, producers should be considering ways to add value to the cattle they are producing. Adding value usually requires a little more labor and a lot more management, but these things are necessary to remain profitable.
ASK ANDREW, TN THINK TANK: At a meeting this week, a question was asked concerning price risk management and where one could find the information to educate themselves about futures, options, and livestock risk protection insurance. The website provided below is where the University of Tennessee’s livestock economic publications are made available to all interested parties. This site contains publications for futures, options, LRP, seasonality of prices, budgets, and much more. The livestock economics group is constantly working to produce the information requested. There are other great resources out there as well, but the following website can link a person to the publications we have completed.
Please send questions and comments to firstname.lastname@example.org or send a letter to Andrew P. Griffith, University of Tennessee, 314B Morgan Hall, 2621 Morgan Circle, Knoxville, TN 37996.
FRIDAY’S FUTURES MARKET CLOSING PRICES: Friday’s closing prices were as follows: Live/fed cattle – October $106.35 -2.18; December $108.10 -1.85; February $108.22 -1.55;Feeder cattle – September $139.93 -1.88; October $135.95 -2.15; November $132.83 -2.03; January $128.98 -1.73; September corn closed at $3.16 down $0.08 from Thursday.
Source: University of Tennessee