FED CATTLE: Fed cattle traded $3 lower compared to last week on live basis. Prices on a live basis were mainly $118 to $119 while dressed prices were mainly $189 to $190. The 5-area weighted average prices thru Thursday were $118.76 live, down $2.64 from last week and $189.78 dressed, down $3.80 from a week ago. A year ago prices were $132.20 live and $210.00 dressed.
Finished cattle may be experiencing softer market prices, but cattle feeders continue to be profitable on cattle being marketed at this week’s price level. There is little reason to have a bullish outlook on finished cattle prices at this time, but there is not much information to support a bearish market either. Finished cattle will likely trade in a fairly narrow range the next several weeks before finding some support leading up to summer grilling holidays.
The futures market is pricing in huge discounts on live cattle through the summer and into early winter. Cattle feeders should remain patient. It appears the futures market has severely undervalued animals in the third and fourth quarter of 2017 which means there is no reason to settle for the huge discount.
BEEF CUTOUT: At midday Friday, the Choice cutout was $194.15 up $0.40 from Thursday and up $0.46 from last Friday. The Select cutout was $189.88 down $0.10 from Thursday and up $0.87 from last Friday. The Choice Select spread was $3.40 compared to $3.81 a week ago.
Modest gains in beef cutout prices this week have done little to help improve packer margins, but most packers are probably glad to see the steady price decline come to a halt. February beef demand is generally weak compared to most other months of the year, but beef industry participants are hopeful retailers, restaurants, and food service providers increase promotional activity similar to one year ago.
The likelihood of wholesale beef prices receiving much of a boost the next several weeks is slim. Thus, if finished cattle prices remain at current levels, packers may be forced to slow chain speeds in order to manipulate the short-term supply.
Reducing short-term supply can bolster prices in the near term, but it generally results in negative price impacts a few months down the road. Packers raked in the profits during 2016, but profits in 2017 are likely to be much lower as beef production continues to increase. Pork and poultry production are on the rise, but relatively strong pork prices are providing some support to competing meat protein markets.
OUTLOOK: Based on Tennessee weekly auction market data, calf and feeder cattle prices were unevenly steady this week compared to last week while slaughter cow and bull prices increased about $2 per hundredweight. Calf and feeder cattle markets in the country were likely hurt by the feeder cattle futures price decline.
Feeder cattle futures began softening last week and witnessed further declines Monday thru Wednesday of this week. In total, March feeder cattle futures lost more than $9 per hundredweight in eight days of trading. However, Thursday saw positive price movement which brings back some optimism for many in the industry.
The January 1, 2017 cattle inventory report was released January 31st and it appeared to have little impact on the futures market. All cattle and calves inventory increased 1.8 percent from a year ago to 93.6 million head. Similarly, beef cow inventory increased 3.5 percent to total 31.2 million head while beef heifers for replacement increased 1.3 percent nationally.
Increases in the beef cow herd and heifers held for replacement will continue to increase the flow of cattle into the feedlot the next few years which will depress prices further.
With increasing cattle numbers and decreasing prices, who has a competitive advantage to be successful and thrive in the cattle business? The answer is the person with the lowest cost of production.
The three largest cost categories in most operations are feed (feed and fertilizer included), depreciation, and labor. Thus, producers with low feed costs, fewer depreciable assets, and with relatively low labor costs will survive the downturn in prices. This means producers in the Southeast have a few competitive advantages.
The primary competitive advantage is the ability to have low feed costs. Many Southeastern U.S. producers do not have low feed costs because of their reliance on feeding hay 120 to 150 days a year. However, the Southeast produces a lot of forage which is inexpensive when harvested by cattle.
With less reliance on mechanically harvested feedstuffs, producers can reduce the quantity of depreciable assets (maybe two tractors instead of four). Similarly, less hay production and shorter winter feeding periods reduce labor needs and costs. These are just a few thoughts to ponder while cattle prices decline further the next couple of years.
ASK ANDREW, TN THINK TANK: I was invited to speak at a conference held at Virginia Tech last Saturday. During my time there, a question was asked concerning why the U.S. imports beef while we are over producing and beef and cattle prices decline. This question and comment bring many thoughts to mind, but I will keep the response brief. First, what is over producing? I do not think the domestic beef market is over producing. We produce a beef product that is differentiated from all other global beef products. Beef produced in Canada is the only comparable beef because they have a similar system. Second, what type of products do we import into the U.S.? Most beef imports are in the lean grinding beef category which pairs well with the fatty grinding meat we produce. Trade may not be the life blood of the beef industry, but it is pretty close and that includes imports. The domestic industry could produce lean beef, but several producers would have to change management and grazing practices to meet the demand. The question then becomes, which method produces more value?
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 –February $116.90 +0.03; April $115.63 +0.15; June $105.65 +0.13; Feeder cattle –March $123.58 -0.18; April $123.50 -0.10; May $122.38 -0.13; August $123.40 -0.08; March corn closed at $3.65 down $0.02 from Thursday.