Market Highlights: Strong Feeder Cattle Market
FED CATTLE: Fed cattle trade was not well established at press. Asking prices on a live basis were mainly $114 to $115 while bid prices were mainly $108 to $111.
The 5-area weighted average prices thru Thursday were $113.11 live, up $3.11 from last week and $172.00 dressed, down $2.86 from a week ago. A year ago prices were $118.02 live and $188.06 dressed.
Fed cattle trade continues to be delayed until late in the week. Maybe cattle feeders and packers were waiting on the cattle on feed report. It just so happened that the pre-report estimate averages hit the nail on the head this month.
Maybe it was the July 1 cattle inventory report they were waiting on to see how many animals are actually in the pipeline to enter feedlots in the third and fourth quarter of 2018. Maybe it had nothing to do with USDA reports at all, and it all had to do with securing the best price possible.
No matter the reason, trading cattle the past couple of weeks has been more difficult than sucking a bowling ball through a plastic straw. The solution to the problem, get a bigger straw or a smaller bowling ball. They will probably compromise.
BEEF CUTOUT: At midday Friday, the Choice cutout was $203.92 down $0.57 from Thursday and down $0.80 from last Friday. The Select cutout was $196.75 down $0.17 from Thursday and down $2.33 from last Friday. The Choice Select spread was $7.17 compared to $8.12 a week ago.
The Choice boxed beef cutout is running about $8 lower than this time last year which may or may not be cause for concern in the packing and beef industry. The lower cutout value is being led by lower prices in the short plate, round, and chuck primal which are trading approximately $16, $14, and $8 lower respectively compared to the same time period last year.
The short plate only makes up about 8 percent of the hot carcass by weight but the round and chuck make up approximately, 22 and 27 percent of hot carcass weight respectively which is the primary reason the Choice cutout is struggling to compete with year ago prices.
The rib and flank primal are trading about $2 lower than last year while the loin primal is $6 to $7 lower than last year. The rib and loin primal contain the highest valued cuts and they comprise approximately 10 and 17 percent of the hot carcass respectively.
The flank primal makes up about 5 percent of the carcass. The brisket, which makes up about 4 percent of the carcass is the only primal to have year over year price gains.
OUTLOOK: It is difficult to be discouraged by current feeder cattle prices if one is on the selling side. Feeder cattle futures have been showing strength and the cash market is in tow though at a slower pace. Based on Tennessee weekly auction averages, steer prices are steady to $2 lower compared to a week ago while heifer prices are steady to $3 lower with most cattle being steady.
Since the inception of the August 2018 feeder cattle contract, the contract price has traded in a range from a low of $135 per hundredweight on April 4th to a contract high of just over $159 which occurred November 2017. More recently, the August feeder cattle contract has been trading in the low to mid $150s which is $15 to $18 higher than where it was trading two months ago.
This same pattern exists for most of the fall and winter marketing months which puts price risk management at the top of mind. Many livestock producers begin thinking about price risk management after prices have taken a plunge and are at a low spot.
Alternatively, price risk management for marketing cattle or any commodity should be addressed when prices are strong. The current market is providing a favorable opportunity to lock in a profitable price or at a minimum set a price floor for fall and winter marketings.
The one issue is that feeder cattle basis is relatively weak which in this case means cash prices have not increased at the same pace as feeder cattle futures. The weak basis could actually be perceived as a positive from a price risk management standpoint for deferred marketings.
For producers hedging the sale of cattle during the fall and winter months, a basis value that stays the same does no harm and a basis that strengthens would mean cash prices would increase more than futures if the price increases and cash prices would decrease less than futures if the price decreases. The moral of the story is to consider price risk management tools now for fall and winter feeder cattle sales.
The July cattle on feed report for feedlots with a 1000 head or more capacity indicated cattle and calves on feed as of July 1, 2018 totaled 11.28 million head, up 4.3% compared to a year ago, with the pre-report estimate average expecting an increase of 4.3%. June placements in feedlots totaled 1.79 million head, up 1.3% from a year ago with the pre-report estimate average expecting placements up 1.3%. June marketing’s totaled 2.01 million head up 0.9% from 2017 with pre-report estimates expecting marketings up 0.8%. Placements on feed by weight: under 700 pounds up 8.0%, 700 to 899 pounds down 6.4%, and 900 pounds and over up 7.5%.
ASK ANDREW, TN THINK TANK: Last week, a producer posed a question concerning feeder cattle basis. The specific question was in relation to why basis on 800 to 900 pounds steers was so wide relative to previous years since demand for feeder cattle appears fairly strong. For those unfamiliar with basis, basis is a value calculated by subtracting the futures price from the local cash price. Thus, a basis value can be calculated for each class and weight of feeder cattle at any point. Basis values do have a seasonal component to them meaning they change throughout the year. However, the expectation is basis in a particular time of year to be fairly consistent across years. Basis variation from year to year does exist, but its variation is generally smaller than price variation which can help with price expectations. For more information on livestock basis, the University of Tennessee has two publications, one with historical basis values for Tennessee (https://extension.tennessee.edu/publications/Documents/D34.pdf) and one concerning the use of basis to manage price risk (https://extension.tennessee.edu/publications/Documents/W320-C.pdf).
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 –August $109.13 +0.23; October $110.25 -0.40; December $114.20 -0.23; Feeder cattle –August $153.68 -0.78; September $154.55 -0.23; October $154.78 -0.15; November $154.25 -0.05; September corn closed at $3.55 up $0.04 from Thursday.
