CATTLE prices are good — really good, in fact. With live cattle prices greater than $130/cwt. and feeder cattle prices well beyond $160, the top line doesn't look bad at all.
However, looks can be deceiving.
It's a well-known fact that feeders have been losing money for more than 30 consecutive months, and a tight supply of feeder cattle may continue to fuel that issue in the short run.
With feeder cattle imports from Mexico down sharply this year and the U.S. cow herd at its smallest in more than 50 years, there simply aren't enough feeders available to keep prices at a more reasonable level.
That might be leading feedyards to overpay for the cattle that are available. This creates a good situation for cow/calf producers, who are now projected to enjoy their best returns since 2005 (Figure), according to the Livestock Marketing Information Center (LMIC).
"Costs faced by U.S. cow/calf operations have surged in recent years," LMIC explained in a recent analysis. "In the past five years, cash costs plus pasture jumped from about $550.00 per cow to nearly $800.00 in 2013."
LMIC said each of the 14 cost categories it includes in its estimate of producer returns increased during the period. Last year, average costs exceeded $700 per cow for the first time.
Estimated cow/calf returns per cow are now projected to hit $125, up from roughly $32 per cow last year.
However, LMIC sounded a major cautionary note: Due to drought, many operations culled heavily, so on the enterprise level, producers may see smaller returns in 2013 simply because they have fewer calves to sell than in prior years.
Now, back to feeders. Consider an average 750 lb. calf going into a feedyard that was purchased at current prices of roughly $165/cwt.
That hypothetical steer would cost $1,237.50. If sold at an average 1,300 lb. at current cash prices — let's say $132/cwt. — that steer would bring in $1,716 gross, leaving only $478.50 to pay for the cost of finishing that steer.
So, feeders may well be paying too much for feeder cattle, bearing in mind the old adage that you're not really a cattle feeder if you're not feeding cattle.
How will the industry rectify that situation? There are only two possible recourses. One is the expansion of the feeder cattle supply, which will take time.
Drought is loosening its grip on some key parts of cattle country, but rebuilding pastures takes time — a considerable amount of time, really — and producers are likely to be cautious about retaining heifers at an aggressive rate.
Most folks now assume that expansion of the breeding herd — and, by extension, the feeder calf supply — will be a relatively slow affair that's further subject to the vagaries of Mother Nature.
Similarly, accessing feeder cattle from Mexico and Canada will remain something of a challenge because a fair deal of uncertainty is stemming from the ongoing country-of-origin labeling dispute.
With Tyson announcing last week that it is halting its purchases of slaughter cattle from Canada, that could lead more feeder cattle south of the border (imports this year are already roughly double last year), but the number of Mexican feeder cattle coming into the U.S. is down 41% year-to-date.
The second possible recourse is for boxed beef values to improve. With prices for the Choice cutout hovering below $200/cwt. for much of the past month (at least for the days the industry had federal data to track), packers had little incentive to be terribly aggressive in bidding for cattle.
Certainly, live cattle prices have improved, and last week's data indicate that boxed beef prices might be getting a little sweeter as well, with the cutout surpassing $200 last Thursday. A sustained run of cutout values at that level would be very encouraging and could provide some additional opportunities (along with cheaper feed) for feeders to make money.
Cash cattle prices remained firm last week, with sales topping $132/cwt. by Thursday. Live cattle futures indicate that the market sees another $2-3 of upside potential through late spring, with near-term contracts firming last week.
Cumulative slaughter for the year continued to run roughly 1.4% smaller than last year, with last week's tally through Thursday averaging almost 122,000 head per day, nearly 1,000 head per day better than the previous week, although still more than 2,000 head per day smaller than last year, of course.
The Choice cutout improved $4.78/cwt. last week, reaching $201.07 on Thursday. The Select cutout also improved, gaining $5.70 to reach $185.68.
With corn prices moderating further, the steer:corn ratio topped 30.5 last week, indicating industry stability. That indicator had not topped 30 for quite some time, and how long it can hold there will be a key to tracking the health of the industry.