Feeder cattle prices may narrow feeding margins

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Cattle feeders are experiencing positive average profit margins for cattle currently being marketed. However, prices of feeder cattle are well above $200-per-cwt, and, even with corn below $4 per bushel, break-even prices for cattle placed on feed this summer are escalating along with feeder cattle prices and are moving close to $160 per cwt. The escalating break-evens will put negative pressure on profit margins if fed cattle prices fail to keep up.

Only once since 1999 (in 2009) has the July 1 inventory of all cattle on feed been as low as the 11.6 million head on July 1, 2014. While some press has been given to increased cattle feeding by under-1,000-head feedlots, it is difficult to demonstrate as current ratios of marketings from 1,000-head-plus feedlots to total commercial steer and heifer slaughter remain relatively high. These ratios would suggest fewer cattle are being fed in the smaller feedlots. It is possible these smaller cattle feeders are growing rather than finishing feeder cattle. The recent disproportionately large placements of over-800-pound feeder cattle in feedlots provide some evidence to support this logic, since pasture resources needed to grow lighter-weight feeder cattle to heavy weights have been drought-constrained until relatively recently.

The enthusiasm that has driven feeder cattle prices to their current record levels—along with improving pasture conditions—imply the potential for relatively large supplies of heavy feeder cattle in late summer/early fall. The improved pasture conditions late this spring and summer have provided stocker operators with the 4 forage they need to grow light-weight calves to heavier weights and may yet allow cow-calf producers to retain heifers for breeding.

To the extent that such heifer retention occurs, it will further reduce feeder cattle supplies for placement on feed. If heifers are not bred until next summer, it will be spring of 2016 before they calve, and 2017 before the bulk of those calves will be placed on feed and marketed as fed cattle. It will take several years of heifer retention to build up heifer/cow inventories to the point of significantly expanding beef supplies.

Constrained beef supplies will provide incentive to pull feeder cattle forward, that is, to place them on feed at younger ages and at lighter weights in an effort to increase short-term beef supplies. With corn prices relatively low, similar to 2009 prices, producers could also keep cattle on feed longer, resulting in a continuation of record-breaking average dressed weights of over 800 pounds per carcass. Weekly moving-average wholesale cutout values also reached record levels recently. Despite the apparent current profitability in the meatpacking sector, L&H Packing Co. in San Antonio, Texas and Cargill Inc. in Milwaukee, Wisconsin have announced plans to shut down in the due to low cattle inventories. This news follows plant closings (Cargill plant in Plainview, Texas, National Beef in Brawley, California, and others previously) and plant downsizing (Cargill in Dodge City, Kansas) announced earlier in the year, all attributed, at least in part, to low cattle inventories and the difficulty in acquiring cattle.

At $5.94 and $5.51 per pound, retail Choice beef and All-fresh beef prices moved deeper into record territory in June. However, there are some indications that consumers may begin to push back against the higher prices.



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