Market Highlights: Staying Current Key for Cattle Feeders

FED CATTLE: Fed cattle traded steady on a live basis compared to last week. Prices on a live basis were mainly $119 to $120 while prices on a dressed basis were mainly $190.

The 5-area weighted average prices thru Thursday were $119.94 live, up $2.86 from last week and $190.32 dressed, up $5.93 from a week ago. A year ago prices were $115.14 live and $179.79 dressed.

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The past two weeks have been kind to cattle feeders as they were able to hold out for higher prices last week and then keep them steady this week. The steady to stronger finished cattle prices come in the midst of lower beef cutout prices which are thinning packer margins.

Alternatively, cattle feeders have been able to strengthen margins the past two weeks as they prepare for two consecutive shortened marketing weeks with Christmas and New Year’s Day on the horizon.

The key for cattle feeders will be to continue moving cattle through the system as being current in marketings has been a friend to the cattle feeder throughout 2017. This could become a struggle as pens are carrying more cattle than a year ago and have been doing so for several months.

BEEF CUTOUT: At midday Friday, the Choice cutout was $199.10 up $0.98 from Thursday and down $2.69 from last Friday. The Select cutout was $187.84 up $0.97 from Thursday and up $4.23 from last Friday. The Choice Select spread was $11.26 compared to $18.18 a week ago.

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The Choice cutout and Select cutout are heading in opposite directions which are resulting in a Choice Select spread that is quickly narrowing. The Choice cutout could have one trick left up its sleeve as some shelves will have to be restocked following the Christmas and New Year holidays. However, it is doubtful packers are counting on a price resurgence from the restocking of meat counters.

Middle meats have been in strong demand leading up to Christmas but sometimes price cannot keep up with the sheer volume of production. The focus will continue to turn towards end meats. This focus by the consumer will continue narrowing the spread as there will be an active competition for the limited amount of Select beef.

The hope for the packer is that the Choice Select spread narrows due to the Select cutout moving higher and the Choice cutout holding its ground. Choice prices will likely move a little lower in coming weeks, but beef prices should be well supported which means the Select beef price will likely move to the upside.

OUTLOOK: There was limited calf and feeder cattle movement this week in Tennessee as the market heads for a break between the Christmas and New Year holidays. However, the limited receipts resulted in higher calf and feeder cattle prices compared to last week’s Tennessee weekly weighted auction averages.

The higher cash prices were set despite softer feeder cattle futures which continue their downward slide. It is either becoming increasingly difficult or rather obvious to the reason for divergence between feeder cattle futures and cash prices for feeder cattle. It would appear the obvious reason is that technical trading has taken over the futures market while cattle feeders continue to purchase cattle based on fundamentals and what they are seeing in the country.

Since January 1st 2012, the basis between the CME Feeder Cattle Index and the nearby feeder cattle futures contract (Index – Futures = Basis) has ranged from nearly a negative $14 to a positive $15 with the average basis being a positive $0.69. The basis between the Feeder Cattle Index and January feeder cattle futures has averaged a little over a positive $7.50 the past couple of weeks. The market has seen a similar positive basis being sustained in the late November and December time periods of 2014 and 2015. However, the following action differed by the year.

Following strong basis values at the end of 2014, basis values continued to be strong into January 2015. Alternatively, following strong basis in late 2015, the basis turned severely negative and then moved more towards the average basis in early 2016.

The key though is that futures prices moved higher in each case. Thus, the expectation moving into January is for the basis on feeder cattle to soften but the softening is expected to come from firming feeder cattle futures and steady cash prices in the country. What this means is that sellers should be cautious using the futures market to hedge marketings in the next month. Alternatively, buyers might benefit from gains in the futures while the cash price sits steady.

The December cattle on feed report for feedlots with a 1000 head or more capacity indicated cattle and calves on feed as of December 1, 2017 totaled 11.52 million head, up 8.1% compared to a year ago, with the pre-report estimate average expecting an increase of 6.6%. November placements in feedlots totaled 2.10 million head, up 13.9% from a year ago with the pre-report estimate average expecting placements up 5.1%. November marketing’s totaled 1.84 million head up 3.2% from 2016 with pre-report estimates expecting marketings up 3.2%. Placements on feed by weight: under 600 pounds up 29.8%, 600 to 899 pounds up 8.7%, 900 to 999 pounds down 25.0%, and 1,000 pounds and over up 44.6%.

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ASK ANDREW, TN THINK TANK: A call came in this week related to a producer evaluating starting a dairy operation or actually renting an existing dairy operation. However, there have been some struggles on the front end identifying an entity to purchase the milk. The great news in this story is that the producer is beginning with the end in mind. However, there has been little success in establishing a market for the anticipated milk production. Additionally, this producer is going to work with a farm management specialist to evaluate the potential returns to the operation before he dives into production. It is beneficial to share this story because this is the route producers should go when analyzing and evaluating new and current enterprises. University of Tennessee Extension has resources in each of the 95 counties and one of those resources is area farm management specialists who can help answer farm financial questions.

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 –December $119.83 +0.20; February $118.58 -1.10; April $119.28 -1.30; Feeder cattle –January $141.55 -1.38; March $138.55 -1.85; April $139.45 -1.65; May $139.35 -1.68; December corn closed at $3.52 up $0.01 from Thursday.

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