Market Highlights: Beef By-Product Prices Not Helping Cattle Market

A stock photo of offal cuts of beef like tripe, heart and liver at a Publix grocery store. ( Wyatt Bechtel )

FED CATTLE: Fed cattle traded $2 higher in the South and $3 higher in the North compared to last week. Live prices were mainly $126 while dressed prices were mainly $207 to $208.

The 5-area weighted average prices thru Wednesday were $126.05 live, up $1.32 from last week and $207.20 dressed, up $2.58 from a week ago. A year ago prices were $120.95 live and $185.88 dressed.

Packers have essentially forced themselves to pay higher prices this week based on out front beef sales made several weeks ago.  It is always nice to market a product in the future to guarantee revenue, but now packers have to deliver the product they sold and that means purchasing finished cattle at whatever price is necessary.

The previous statement makes it sound worse than it is because most of those out front sales were hedged through the purchase of April Live cattle futures. The finished cattle market may still have some life to it the next few weeks as cattle feeders will be holding for higher money. Time is running out for cattle feeders to get to the $130 mark they hoped to achieve so the best course of action is to hold the line as long as possible.

BEEF CUTOUT: At midday Thursday, the Choice cutout was $233.21 up $0.45 from Wednesday and up $4.48 from last Friday. The Select cutout was $221.78 down $0.65 from Wednesday and down $2.27 from last Friday. The Choice Select spread was $13.70 compared to $6.95 a week ago.

The Choice and Select beef cutout values are calculated using beef items originating from the seven primal cuts in a carcass. However, the primal cuts are not the only revenue generating portions of the animal as by-products, also known as hide and offal, account for a large portion of the animal.

There are edible, inedible, and medicinal by-products such as the liver, tripe, tongue, oxtail, cheek meat, and the hide that add value to an animal. The steer by-product price is currently trading just over $9 per hundredweight which is one of the lowest values dating back to 2009. This compares to the 2011 through 2014 time period when the drop value ranged from about $12.50 to $16.50 per hundredweight. Thus, a 1,300 pound steer in today’s market would return about $117 per head while a $14 price would return $182 per head. To say the least, the drop credit is negatively influencing finished cattle prices compared to the past few years and there is little to no sign of the market exiting its poor condition.
OUTLOOK: The April feeder cattle futures contract has had a daily close between $142 and $148 since early November except for a three day stint in March when it was trying to bump $149. Thus, the April contract has had a flat trend line for the past five months with little to no intention of breaking out in either direction.

The same cannot be said for the summer and fall feeder cattle contract months that have traded from the mid $140s to the low $160s over the same time period. The summer and fall contracts are currently trading at the top of this range which means those contracts are trading with a $16 to $18 premium over the CME feeder cattle index which is sitting just shy of $144 per hundredweight. For those not familiar with the CME feeder cattle index, it is a seven day weighted average price of 700 to 900 pound steers trading in a 12 state region.

In general, the CME feeder cattle index and the feeder cattle futures contract prices will converge as has happened with the April contract that currently has less than a $2 difference between it and the index. Thus, an opportunity exists with the summer and fall contracts to capture basis value in the feeder cattle markets as the cash price and the futures price for the contract month are expected to converge.

Using August which has been trading just north of $160 as an example, the index or the cash market has to increase, futures have to decrease, or some mixture of both have to occur for convergence by August. This provides producers a good opportunity to capitalize on the basis difference for the summer and fall months. This type of opportunity is not always present, but it is present in today’s market. Producers should consider taking advantage while they can if cattle marketing is expected from August through November.

The April cattle on feed report for feedlots with a 1000 head or more capacity indicated cattle and calves on feed as of April 1, 2019 totaled 11.96 million head, up 2.0% compared to a year ago, with the pre-report estimate average expecting an increase of 1.8%. March placements in feedlots totaled 2.01 million head, up 4.8% from a year ago with the pre-report estimate average expecting placements up 3.8%. March marketing’s totaled 1.78 million head down 3.4% from 2018 with pre-report estimates expecting a 3.2% decrease in marketings. Placements on feed by weight: under 700 pounds up 4.2%, 700 to 899 pounds up 6.9%, and 900 pounds and over down 1.9%.

ASK ANDREW, TN THINK TANK: It has been a slow week for questions about the cattle market and farming in general. The favorable weather must have had folks out performing manual labor and enjoying the sunshine. As the storms began to make their way across Tennessee and much of the Southeast late this week, it reminded me of the darkness that “came over all the land” (Matthew 27:45) on the day Jesus was crucified. Three days later, Jesus was resurrected which will be celebrated this Easter Sunday. As much as I enjoy talking about cattle markets, I enjoy talking about Jesus more. People ask my opinion on cattle markets fairly regularly which means they must value my opinion on that subject to some degree. Fewer people ask my opinion about Jesus Christ, but here is the truth. It is not enough to believe in God and Jesus Christ because even the demons believe this (James 2:19). A person must have faith He exists and earnestly seek to have a relationship with Him (Hebrews 11:6). It amazes me that we as humans place more value on the words and actions of other humans than we do on the divine Word of God. Life and death happen once, but it is for an eternity!

Please send questions and comments to [email protected] 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 –April $128.53 +1.60; June $122.68 +0.30; August $119.75 +0.20; Feeder cattle –April $145.70 +0.38; May $151.53 +0.93; August $160.68 +0.23; September $162.08 +0.23; May corn closed at $3.59 up $0.01 from Thursday.