Darrell Mark
In the Cattle Markets
Records were meant to be broken.
(March 14, 2011) — The cattle market seems to be buying into the old phrase "records were meant to be broken." The fed-cattle market shattered the old record set back in the third week of October 2003 for the last four weeks in a row. That previous high at $108.80 per hundredweight (cwt.) in the Five-Area Market was a relatively short-lived spike as the U.S. market was adjusting to the lack of Canadian fed-cattle supplies following an import ban spurred by that country's first case of bovine spongiform encephalopathy (BSE) earlier in the year (and before the first U.S. BSE case later that year). The current rally, however, looks to be more sustained.
The average Five-Area Market price for the week of March 6-12 was $117.89 per cwt., $5.50 per cwt. higher than the previous week's average of $112.39 per cwt., which also was a record up to that point. Prices in the two consecutive weeks prior to that, at $111.02 per cwt. and $109.68 per cwt., respectively, were also records.
The fed-cattle market wasn't the only one to post records that week. Live-cattle futures also posted an all-time high for the nearby contract at $117.65 per cwt. March 10. The "old" futures market record, which has been broken several times lately, was $103.80 per cwt. on July 3, 2008. Feeder-cattle futures similarly posted a record high March 9 at $132.20 per cwt. The "old" record was $119.47 per cwt. on Sept. 6, 2007. The sharp rally in boxed beef prices the second week of March also resulted in the highest boxed beef prices since October 2003.
In all this talk of record prices, two questions naturally surface:
1. Why have prices reached these levels?
2. Will they go higher this spring?
Most editions of "In the Cattle Markets" for the past several months have addressed the variety of reasons why cattle prices have reached record highs. Primarily, it is due to declining supplies of cattle and modest improvements in beef demand. While the tight supply situation isn't new information, the annual cattle inventory report confirmed it. Plus, part of the "surprise" (if there was one) in reaching these price levels right now is the realization that the increased cattle-on-feed inventory for the past several months is the result of lighterweight calves being placed last fall that are not finished yet — and won't be until late April at the earliest.
So, will prices go higher yet this spring? It is quite possible. Seasonally, the spring high is not usually posted in March. In only three years out of the last 19 has the fed-cattle market posted its high sometime in March. In eight of those 19 years, the high was posted in April, with the second week of April being the most common week for the high.
Although the seasonal trend would point to higher prices yet this spring, the typical seasonal increase from mid-March to the second week of April averages to only about $1 per cwt. What could help the market reach higher highs is cattle weights.
Carcass weights for the past several weeks have been somewhat erratic, with some sharply lower weights being reported. Some of this was a function of winter storms that reduced weights for a week or two. Some of this was likely cattle being pulled ahead and marketed earlier than planned due to good prices. Additionally, part of the drop in cattle carcass weights is attributed to a decline in cow weights, which may signal more dairy cow slaughter relative to beef cow slaughter. Regardless, lower weights imply packers have to slaughter more cattle to generate the same amount of beef production, which helps the market stay current.
The strength of the fed-cattle market has kept feedlot operators actively placing cattle on feed through this winter. As projected margins on placements eroded through February, it appears placements last month slowed compared to that of the last several months. However, the March 18 Cattle-on-Feed Report is likely to show an increase of around 2% in February placements compared to last year. This partly reflects cattle feeders' willingness to buy cattle "on the come" given current closeout profits and lack of cattle to place later this year. Additionally, increased imports of feeder cattle from Mexico last month resulted in more placements in the Southern Plains.
For current placements in mid-March, the 64¢-per-bushel (bu.) drop in the corn market (basis March corn futures) last week provides substantial help to deteriorating margins. However, much of it was bid into feeder-cattle markets that were up anywhere from $2 to $5 per cwt., or more, last week. Feeder-cattle futures gained almost $3 per cwt. last week.
Feeding cost of gain, projected at the current Omaha, Neb., corn price of $6.50 per bu. and wet distillers' grain price of $68 per ton, is about $102 per cwt. Feedlots still feeding corn bought and bunkered during harvest last fall likely have cost of gains well below that figure yet, while others without access to distillers' grain may have a higher cost of gain. At current feeder-cattle prices, basis Nebraska, and typical feeding performance, this would result in a loss of about $35 per head for yearling placements. While projected red ink isn't desirable, it would only take a $3-per-cwt. rally in August or October futures to erase these losses.