Market Highlights: Unhedged Stocker Cattle Could See Losses

By: Andrew P Griffith, University of Tennessee

FED CATTLE: Fed cattle traded steady compared to last week on a live basis. Live prices were mainly $115 to $116 while dressed prices were mainly $186 to $187.

The 5-area weighted average prices thru Thursday were $115.66 live, down $0.13 from last week and $186.45 dressed, up $1.74 from a week ago. A year ago prices were $109.82 live and $177.63 dressed.

There is no definitive way to know what halted the finished cattle price collapse in the cash market, but something came to the aid of cattle feeders. Finished cattle continue to trade with a positive basis which is desirable for anyone on the selling side of a transaction. However, the June live cattle contract is trading around $110 and the expectation would be to see convergence of the futures contract price and the cash price. The seasonal tendency moving through the summer months is for finished cattle prices to soften, and it is difficult to speak against seasonality unless there is extremely strong evidence to back up such an assertion. Cattle feeders will be treading lightly the next couple of months with the hope that prices are supported.

BEEF CUTOUT: At midday Friday, the Choice cutout was $223.82 up $0.24 from Thursday and up $2.32 from last Friday. The Select cutout was $208.21 down $0.66 from Thursday and down $0.27 from last Friday. The Choice Select spread was $15.61 compared to $13.02 a week ago.

The monthly cold storage report was released last week with the quantity of red meat and poultry in cold storage at the end of April. Staying away from all the factors that influence cold storage stocks and focusing on actual stocks, beef in cold storage at the end of April totaled 430 million pounds. This is the lowest quantity of beef in cold storage since June 2017 and the third lowest monthly quantity dating back to November 2014. This places beef in cold storage at a very manageable level. Pork in cold storage at the end of April totaled nearly 622 million pounds which is the highest level since May 2018 and the third largest monthly quantity since September 2016. Total chicken in cold storage remains relatively elevated with more than 893 million pounds of product in cold storage which is very much in line with year ago levels. However, year ago levels were 140 million pounds above the five year average for April. At this time, total red meat and poultry stocks are manageable, but it is important information to keep an eye on as the market could be influenced if meat begins to back up.
 
OUTLOOK: Weekly livestock auction summary data is not available for the second consecutive week due to USDA transitioning the reporting format. However, looking at individual sale reports, it would appear that steer prices were steady to slightly higher compared to last week while heifer prices were steady with a few instances of lower heifer prices. Similarly, slaughter cow and bull prices were steady to slightly lower compared to a week ago. As the local calf market is transitioning from a somewhat typical spring price peak to softer prices in the summer months, the feeder cattle market has shown no signs of making a seasonal price run. This is reflected in both the cash markets and the futures markets. The four remaining feeder cattle futures contracts for 2019 as well as the four feeder cattle contracts trading in the first half of 2020 are all trading in less than a $2 range. Maybe today’s futures market quotes are correct in predicting the future cash price for the next twelve months, but it seems highly unlikely that feeder cattle will continue to trade in such a narrow range. Given the $27 price decline over the past five weeks in the futures market, it would be nice to say that this market only has one direction to go and that is up, but this is not possible to say right now as several contracts traded down the limit on Thursday with big losses again on Friday. The one thing that can be said is that low prices will eventually cure low prices. As lower prices remove profitability from the market, producers will reduce production at the cow-calf level. However, the current price signal was sent too late to impact the current breeding season. The producers who will suffer the most in the near term are stocker producers who purchased high priced calves this spring without hedging the sale of those cattle. The strong futures market during March and April ramped up calf prices and now the owners of those cattle have been watching potential profitability dissipate into mounting losses.

ASK ANDREW, TN THINK TANK: The question this week was in relation to planting soybeans or planting a summer annual for hay. In this particular situation, the producer has 70 acres that he generally plants in soybeans, and he pays someone to spray, plant, harvest, and haul the soybean crop. Alternatively, he was considering planting a warm season annual for hay in which he would do all of the work. The first question was in relation to which would be the most profitable venture this year which can be answered with some simple budgeting and expectations on yields and prices. However, more information is needed to answer the question for this particular producer. With all of the soybean work being custom hired, does the producer want to take the time to do all the hay work? Secondly, 70 acres of warm season annual forage could produce 700 rolls of hay at a five ton yield and 1,000 pound bale. Seventy acres of soybeans can be hauled to the elevator at any time and fairly easily. Alternatively, there are not many hay customers looking for 700,000 pounds of hay which means more time in getting the product moved.

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 –June $108.48 -1.60; August $103.08 -1.98; October $103.90 -1.78; Feeder cattle –August $133.13 -5.10; September $134.08 -4.45; October $134.53 -3.83; November $135.00 -3.70; July corn closed at $4.27 down $0.09 from Thursday.