Market Highlights: Choice-Select Spread Narrows for Beef

Market Highlights: Choice-Select Spread Narrows for Beef

FED CATTLE: Fed cattle traded steady compared to last week on a live basis. Prices on a live basis were mainly $119 while dressed prices were mainly $188.

The 5-area weighted average prices thru Thursday were $117.00 live, up $0.59 from last week and $186.51 dressed, up $3.63 from a week ago. A year ago prices were $117.08 live and $184.39 dressed.

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The December live cattle contract traded as low as $111 per hundredweight at the end of August and was still only trading in the $114 to $115 range one month ago. However, prices have been slowly increasing since the middle of November with nearly a $5 per hundredweight move.

The increase is supporting late year finished cattle marketings, but many feedlots have turned their focus to the February and April contracts that have witnessed similar price escalations. The April contract is the focus for most of the cattle placed in October and November and heavy cattle placed in December.

Despite cattle feeding losses on a cash basis, one would have to expect that many cattle have been hedged and others are being hedged now.

BEEF CUTOUT: At midday Friday, the Choice cutout was $212.72up $0.25 from Thursday and down $0.85 from last Friday. The Select cutout was $204.24 up $3.24 from Thursday and up $3.99 from last Friday. The Choice Select spread was $8.48 compared to $13.32 a week ago.

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The Choice-Select spread is narrowing quickly now that the holiday purchasing is complete. This is the narrowest the spread has been since the middle of September, and it is much narrower than the $14 to $22 weekly average spread that engulfed pre-holiday purchasing in December 2017.

If history is any indicator of the future then the Choice-Select spread could narrow to as little as $1 to $3 in the coming months as it did in February and September of 2017. In contrast, the Choice-Select spread only narrowed to $4 to $6 in February 2018.

The factors that drive the narrowing of the spread during the winter months two fold. The first is the movement of retailers and consumers from middle meats to end meats which tend to be cuts where differentiation between Choice and Select is not as great. The second is the seasonal increase in quality grade that tends to peak in the first quarter of the year. The factor this year that may further contribute to narrowing of the spread is the 3 to 4 percent year over year increase of cattle grading Choice and Prime compared to last year.
 
OUTLOOK: Based on Tennessee weekly auction price averages this week, slaughter cow prices were steady compared to last week while slaughter bull prices were steady to $1 lower. Similarly, steer prices this week were $1 to $5 lower compared to last week’s prices while heifer prices were steady to $3 lower than the prior week.

The fall rush of calves and slaughter cows seems to be winding down as the official start of winter is only one week away. Calf prices in 2018 were very much in line with 2017 prices from May through November which may be good or bad depending on each individual producer’s cost structure.

However, some weakness appeared in the feeder cattle market and has been present since the middle of October. The late appearance of a softer feeder cattle market actually helped support calf prices through the largest runs of calves this fall, but softer calf prices the past two weeks are a result of lower feeder cattle prices.

With that said, what caused feeder cattle prices to soften the past couple of months? The strongest argument probably comes from a lack of presence of farmer feeders in the market. Farmer feeders generally become active in the feeder cattle market immediately following harvest, but harvest was delayed in many areas due to precipitation which has meant farmer feeders have remained on the sidelines. As harvest is now coming to completion in many areas, farmer feeders will begin to exercise some of their purchasing power.

Given the prior thoughts, it is assumed farmer feeder purchasing may be more concentrated than in previous years which in turn could lead to tremendous support in the feeder cattle market immediately following the holidays. This methodology of thinking is not a guarantee of higher feeder cattle prices, but farmer feeder purchasing power gains strength with low corn prices. Understanding that this analysis expects higher prices for feeder cattle in the next couple of months, it should also be stated that downside risk compared to today’s price would appear very small.

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ASK ANDREW, TN THINK TANK: Other than the cow-calf sector of the cattle business, the remaining sectors of the business are either service providers or margin operators. The margin operators are generally separated in stocker/backgrounder, feedlot, and packer. Questions abound from cow-calf producers who are not extremely familiar with these industries. Some key aspects to note about each of these industries is the importance of cash flow to continued operation, how recent profits and losses influence willingness to pay for the next group of cattle, how expected margins influence cattle purchase price, how risk management is necessary in some instances, and how Mother Nature can influence decisions. For example, cash flow is important in every business, but it becomes increasingly important in tight margin businesses that require large capital investments. The inability to purchase the next turn of cattle due to a lack of cash or borrowed capital can trickle down to cow-calf producers. Producers with questions about these sectors are encouraged to read about these sectors and put him or herself in the decision maker’s shoes.

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 $119.58 +0.13; February $122.40 -0.45; April $124.50 -0.30; Feeder cattle –January $147.58 -0.40; March $145.78 -0.15; April $146.25 -0.25; May $146.35 -0.15; December corn closed at $3.77 up $0.01 from Thursday.

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