Market Highlights: Feeder Cattle Bubble Could be Ready to Burst

FED CATTLE: Fed cattle traded steady compared to last week on a live basis. Prices on a live basis were mainly $109 to $111 while prices on a dressed basis were mainly $173 to $174.

The 5-area weighted average prices thru Thursday were $109.96 live, down $0.67 from last week and $173.89 dressed, up $0.13 from a week ago. A year ago prices were $109.82 live and $173.06 dressed.

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Make it six weeks of essentially steady prices in the finished cattle market. Following several years of large price swings and major price volatility at times, cash prices for finished cattle have found a rut and cannot seem to get out.

The packing industry would appear to be the winner in this situation as beef cutout values seem to have found some traction and cattle feeders cannot seem to gain the leverage that is typical this time of year. Prices for live cattle will be expected to move in a positive direction during the fourth quarter.

The results of the last month and a half may be indicating a moderate fourth quarter increase or it could be setting the stage for a violent surge in prices.

BEEF CUTOUT: At midday Friday, the Choice cutout was $208.22 up $1.40 from Thursday and up $5.33 from last Friday. The Select cutout was $193.86 up $1.51 from Thursday and up $0.68 from last Friday. The Choice Select spread was $14.36 compared to $9.71 a week ago.

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October is not known as the strongest beef demand month, but beef demand does typically begin to gain some momentum following sluggish September demand. The Choice cutout price usually garners some support from rib and loin cuts as the holiday season approaches, but support for Choice beef has been slow to develop.

The first signs of support appeared this week and the expectation is for the support to build through the end of the month and into November. Demand has been a strong supporter of beef prices in 2018, and the expectation is for continued support. However, the market is also aware of increasing production which will temper the price impact of demand.

Similarly, the red meat market is heading into the seasonal production peak for pork. Pork production is seasonally lowest in the summer months before peaking in November and December. The lower prices on hams and other pork products result in serious interest from red meat consumers. Thus, red meat production will keep beef prices from exploding to the upside.
 
OUTLOOK: Weakness in the calf and feeder cattle markets continued to persist this week with steer prices being $1 to $4 lower while heifer prices were $1 to $3 lower compared to last week’s Tennessee weekly auction average prices. Prices this week resulted in 525 pound steers averaging about $775 per head while 525 pound heifers averaged $675 per head.

This week’s cash prices represent a break of about $20 per head on freshly weaned calves compared to two weeks ago when feeder cattle futures were trading at or near their contract highs. In the past two weeks, fall 2018 feeder cattle contract prices declined $4 to $5 while some of the 2019 contracts declined as much as $7 per hundredweight.

The first aspect of the market to note is that the extremely strong futures market supported calf prices through the end of September. The second aspect to note is that freshly weaned calf prices do not fully reflect the decline witnessed in feeder cattle futures. When feeder cattle futures decline $1 per hundredweight then the expectation is for calf prices to decline more than $1 per hundredweight during the fall marketing time period.

Given the results of how the market is reacting, one may surmise strong demand for calves. This is probably a safe hypothesis for the strength in the fall calf market as potential for grazing winter wheat in the Southern Plains remains positive. Similarly, most of the Southeastern United States has had favorable fall moisture and temperatures to promote fall forage growth as well as winter annual grazing opportunities.

Despite calf demand support, freshly weaned steer and heifer values have the potential to fall below $750 and $650 per head respectively which would equate to prices declining $5 more per hundredweight. The risk of prices declining more than $5 per hundredweight on freshly weaned calves moving through the rest of fall is relatively small and will likely be short lived if it actually occurs.

The October cattle on feed report for feedlots with a 1000 head or more capacity indicated cattle and calves on feed as of October 1, 2018 totaled 11.40 million head, up 5.4% compared to a year ago, with the pre-report estimate average expecting an increase of 6.3%. September placements in feedlots totaled 2.05 million head, down 4.6% from a year ago with the pre-report estimate average expecting placements up 0.3%. September marketing’s totaled 1.72 million head down 3.6% from 2017 with pre-report estimates expecting a 3.5% decline in marketings. Placements on feed by weight: under 600 pounds up 4.9%, 600 to 699 pounds down 2.9%, 700 to 999 pounds down 8.8%, and 1000 pounds and over up 4.3%.

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ASK ANDREW, TN THINK TANK: Oftentimes, I am tough on cattle producers including myself due to our resistance and unwillingness to change production and marketing practices. My delivery style is sometimes meant to step on toes and to get producers thinking of ways to make changes that could benefit their operation. However, I should also sing praise to producers as there are several producers asking questions and making changes that benefit their operation and the cattle industry as a whole. A question was asked this week as to why a specific alliance sale is not seeing the price premiums they expected. The reasons could be many, but this alliance is in its infancy. It will take time for the producers in this feeder cattle alliance to develop a reputation. Additionally, price is not the only benefit in an alliance as the preconditioning and backgrounding phase should result in added weight to the calf crop and reduced shrink. Producers who consistently provide low risk cattle that perform will be paid for their efforts, but that does not mean one should become complacent.

Please send questions and comments to agriff14@utk.edu 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 $112.25 -0.83; December $116.78 -0.40; February $121.15 -0.23 Feeder cattle –October $154.65 -0.60; November $154.10 -0.33; January $148.75 -0.68; March $147.05 -0.98; December corn closed at $3.67 down $0.04 from Thursday.

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