FED CATTLE: Fed cattle traded $2 to $3 lower on a live basis compared to last week. Live prices were mainly $97 to $98 while prices on a dressed basis were mostly $152 to $155. The 5-area weighted average prices thru Thursday were $97.59 live, down $3.32 from last week and $153.93 dressed, down $5.13 from a week ago. A year ago prices were $123.20 live and $198.56 dressed.
The 5-area weekly weighted average price for finished cattle has fell below $100 for the first time since December 2010. It is difficult to know where the bottom of the market is, but the market is definitely closer to the bottom this week than it was last week because prices are lower.
With the continuation of the elevated slaughter levels, one can only surmise that finished cattle prices will decline further. Cattle feeders continue to market cattle aggressively as they should, because the economics of the situation say the feeder cattle purchased today have a greater potential for profit than cattle currently on feed. The situation today is almost the exact opposite of the situation a year ago when cattle feeders were delaying marketings.
BEEF CUTOUT: At midday Friday, the Choice cutout was $182.57 up $0.97 from Thursday and down $0.95 from last Friday. The Select cutout was $172.18 down $0.43 from Thursday and down $2.74 from last Friday. The Choice Select spread was $10.39 compared to $8.60 a week ago.
Packers continue to harvest cattle at a quick clip. Packers have maintained leverage over the cattle feeder which is usually not the case this time of year. The aforementioned leverage has provided packers the opportunity to continue purchasing finished cattle at lower prices for several weeks running. The increased slaughter rate has resulted in more beef on the market which has pressured wholesale beef prices.
Despite lower cutout prices, packer margins remain in strong order because of lower cattle prices. Leverage will eventually shift to the cattle feeder resulting in higher finished cattle prices, but the timing of that shift is less certain. When the leverage shift comes, packers will be looking to earn more from each primal cut. Most primal cuts in the beef carcass are dragging cutout prices, but primal cuts are not the biggest drag on carcass value.
The biggest drag may be the 50 percent lean trimmings which are the trimmings left over after the cutting and fabrication process. Lean beef needs seem somewhat slow as both 50’s and 90’s are experiencing depressed prices.
OUTLOOK: As feeder cattle futures prices continue to surge lower, the new question is if feeder cattle futures prices will fall below the $100 mark in the coming months. All of the 2017 feeder cattle futures contracts currently being traded are hovering around $110.
It is important to note, all of the deferred contracts starting with November 2016 contracts represent an 800 pound steer instead of the 750 pound steer that was represented in previous contracts. However, the 50 pound weight increase in the contract only depresses contract prices $3 to $4 per hundredweight.
Thus, will feeder cattle futures dip below $100? The answer is they very well could. One would have to go all the way back to February 12, 2010 to find a day when the nearby feeder cattle futures price dipped below the century mark. Maybe more important to producers are the cash prices being received at the auction market.
Based on Tennessee weekly auction averages, 522 pound steer prices averaged nearly $112 per hundredweight this week. Similar to feeder cattle futures, one has to go back to November 2010 to find prices lower than current prices for 500 to 600 pound steers. Current prices are not completely debilitating to the financial stability and survivability of an operation, but current prices do make it difficult to experience positive returns. Given market fundamentals of supply and demand, it would appear cattle are being undervalued in today’s market. However, cattle were grossly overvalued in the market in 2014, 2015, and much of 2016.
Since the animals appear undervalued, the market is right for buying instead of selling. Buying does not necessarily mean going to the market and purchasing animals, though it could. Another example of buying would be delaying marketing of animals.
Calf values are probably $100 to $150 below what their value should be in today’s market. However, most actions cause reactions, and sometimes one force is met with an equal but opposite force. It seems the force that drove cattle prices to record highs has been met with an equal and opposite force towards the downside. Don’t expect record low prices though!
ASK ANDREW, TN THINK TANK: A question was asked today about the Pasture, Rangeland and Forage insurance program (PRF). PRF is an insurance program for hay and pasture producers to protect against shortfalls in forage due to lack of rainfall. The program is based on a rainfall index where payments are determined based on rainfall on a grid system. This program can be used to insure hay and pasture ground in all months throughout the year. The program is set up such that months when rainfall is below average a payment is received which can then support the purchase of feed for livestock or in the case of a hay producer provide revenue of a failed crop. For more information, visit Risk Management Agency's site.
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 $95.90 1.45; December $97.45 1.28; February $99.38 1.43; Feeder cattle –October $120.38 0.93; November $115.65 0.83; January $112.00 0.45; March $109.75 0.10; December corn closed at $3.54 up $0.05 from Thursday.