Are Cattle Prices Running Out of Steam? Views are Mixed

As grain prices remain fairly stagnant, momentum is gaining in the cattle complex. Cattle futures at the Chicago Mercantile Exchange (CME) are on fire this week after hitting contract highs. It’s the livestock sector carrying agriculture’s balance sheet the latter half of 2017 -  a trend that could continue to wrap up the year.

“The seasonal tendency in this market turns a little bit friendly for the month of November,” said Joe Vaclavik, president of Standard Grain. “It’s a little premature to talk about that but it's something a lot of traders looking forward to, especially as some of these contracts are making some fresh multi-month highs.”

Cattle prices ended on a high note on Tuesday, gaining back momentum Thursday. The positive price action coming in spite of a large Cattle on Feed report, and growing cold storage stocks.

USDA says cattle placements are 13 percent higher than last year, the highest level since 2011. While the number is hard for a growing protein sector to swallow, a growing cattle herd comes as no surprise to many traders.

“If you go back and look at last month's Cattle on Feed report, it did have an impact on the market, it kind of set us back and it’s taken from then until now to regain the ground that we lost,” said Scott Dryer, grain and livestock specialist with Blue Reef Agri-Marketing.

“Feedlots have really taken advantage of the cheaper feed, the lower cost of grain they've got right now, they’ve got a lot of incentive to feed something,” said Derrell Peel, livestock specialist with Oklahoma State University (OSU). “They loaded up on these bigger feeder cattle and they also loaded up in some cases on lighter weight cattle - I think it's just a matter of filling those feedlots up taking advantage of the volume that they've got available right now.”

Dryer says traders in Chicago paid attention to the numbers in the latest cattle on feed report, but a larger herd is something the trade expected. As a result, it didn’t phase the stronger prices.

“We were still within the range of trade estimates,” said Dryer. “Then you got to take a step back and also look at show lists are down, carcass weights are starting to fall, boxed beef over $200.”

Dryer says that’s a sign of strong demand, and it’s that demand carrying prices.

“Even if we go back and look at large placement numbers from a kill standpoint, we're outpacing these large placement numbers, so we've got a lot of strength in it,” said Dryer. “The bottom line is we've got demand that's keeping up with the market quite well.”

“There's no major imbalances,” said Peel. “We know we've got some supply challenges going forward but demand has been very good. And as long as that holds true then the rest of this stuff works pretty well.”

The demand is surfacing domestically and abroad, as beef exports are holding strong. It’s domestic demand that could hold in the coming months, especially with the holidays typically acting as a gift to the livestock markets.

“What we've got to realize is right around the corner we're coming into Thanksgiving and Christmas, so we'll start to hit another demand peak,” said Dryer. “From a kill standpoint, the packers are going to have to start looking at those numbers to get to production that we're going to need to come into those holiday seasons.”

Dryer says if demand can keep pace and carcass weights remain low, the market looks favorable for prices. However, he says the roller-coaster of price volatility is here to stay.

“We've got that in the market, and it's going to be a very long time to get rid of it,” said Dryer. “However, from this point forward, the market looks pretty good as we get through winter and start looking at that spring market.”

Even with strong demand, Sterling Marketing president John Nalivka isn’t as optimistic on prices, projecting futures to see pressure as the calendar flips to 2018. He questions if demand can keep up, mainly due to the growing total meat supply, for not only beef, but pork and poultry. Nalivka projects beef production to be up 6 percent this year, with another 2 percent increase in 2018. He thinks commercial pork production will increase 3 percent this year and another 4 percent next year.

“The issue I have is in 2007 we had record per capita meat supply at 222 pounds per person,” said Nalivka. “In 2014, we had dropped that number to 202 pounds, due to record prices across the complex. That’s a 10 percent drop in total red meat poultry supplies. Then, from 2014 to 2017, we’ve already gained back 8 percent of that per capita supply number back of around 218 pounds per person.”

As Nalivka watches the protein sector grow, he thinks 2018 will be the year per capita meat consumption reaches the record supply level the industry saw in 2007.

“Maybe we have enough demand to pick up all that additional meat, but I question that,” said Nalivka. “It’s largely driven by export demand, so it’s going to take exports to keep this pace, and export markets are driven by currency rates.”

While the outlook on prices remains good for analysts like Dryer who is bullish on demand, he knows at some point hefty cattle prices will drive away demand.

“Eventually we'll have to price ourselves out of the market, and that may be part of what the market's searching for at this point is at what price are cattle too high and where will we hurt demand,” said Dryer. “Apparently we're not there yet, so it seems that we've got some freeway to go.”