While conditions in the Southern Plains, Southwest through California, and most of the West are improved over year-earlier conditions, most of the areas remain in serious drought. Some areas have had rain over the last few weeks, while other areas have deteriorated. At the same time, the corn crop continues in good-to-excellent condition, and estimates for both per-acre yields and total production continue to increase as the summer progresses. As a result, corn prices continue to decline. The declining corn prices have been a positive factor in the continuing increases in feeder cattle prices.

USDA National Agricultural Statistics Service (NASS) released its 5-year revisions of inventory estimates for the major livestock species earlier this month. In its 5-year revisions, NASS raised a number of cattle inventory estimates back through January 1, 2008. Despite the changes, the revisions changed very little and have little or no effect on current or future inventory dynamics.

Monthly average dressed weights of all cattle slaughtered have continued their seasonal increase into September. Historically, dressed weights typically peak during October and decline into the next year, often reaching seasonal lows in April-May. However, in 2011, 2012, and 2013, peaks were later than is typical, with a November peak in 2013 and not peaking until the following year in both 2011 (peaking in February 2012) and 2012 (peaking in January 2013). In 2014, federally inspected dressed weights bottomed in May at 790 pounds per carcass, 8 pounds above the May 2013 low and a record high for a May average.

Further, declining corn and soybean meal prices have encouraged producers to keep cattle on feed longer, which could also contribute to heavier average dressed weights over the near term. Cheaper feed and favorable pasture conditions — combined with reduced placements of heifers on feed (which produce smaller, lighter carcasses), fewer cows (which also produce smaller carcasses) in the slaughter mix, and an increase in the relative proportion of larger, heavier steers in the slaughter mix—will likely lead to significantly heavier averaged dressed weights for the remainder of 2014 and into 2015. However, any increases in dressed weights likely will not completely offset the decline in slaughter numbers, which is expected to lead to continued year-over-year declines in total beef production.

Increasing cattle and beef prices will also motivate cattle feeders to try to pull feeder cattle forward—that is, to try to place younger, lighter feeder cattle on feed—in order to meet likely increased demand for fed cattle. Generally, lighter weight placements yield lighter fed cattle, and, to the extent this tendency holds, pulling cattle forward will tend to result in more but potentially lighter carcasses. The impact on beef production will be ambiguous because more lighter cattle placed into and marketed from feedlots may or may not result in greater beef production.

At the same time, when prices follow a typical seasonal pattern, they peak in the spring, then drop in summer and fall, with lows often occurring in late summer. In 2012 and 2013, prices bottomed earlier in the summer, then began generally rising until the following spring peaks. This year, fed cattle prices appear to have reached lows in late spring/early summer and continue to move erratically higher, jumping almost $6 per cwt in one recent week.

With weekly cutout values 6 (Choice) to 8 (Select) percent off their early August peaks, increases in cutout values are not keeping pace with increases in fed cattle prices, and beef packers’ margins are being squeezed again. Packers will likely try to reduce kills in the weeks ahead in an attempt at raising cutout values to stay ahead of fed-cattle price increases. If successful, this action would ease some of the pain associated with buying $160-plus per cwt fed cattle and slow the narrowing of packer profit margins.

Both average monthly Choice retail and All-fresh beef prices reached new record highs in July. However, the higher prices reportedly make featuring beef to draw retail customers more difficult and less likely.

Source: USDA Livestock, Dairy, and Poultry Outlook