LIVESTOCK MARKETS: Cattle market fundamentals different this yearLIVESTOCK MARKETS: Cattle market fundamentals different this year
U.S. clearly set up for weaker cattle and beef prices compared to last year.
April 19, 2018
Stephen Koontz, Colorado State University agricultural market expert, said cattle markets over the past three weeks have shown that they are not immune to the concerns over trade disputes nor the general volatility that has taken over in the equity markets. However, while cattle markets moved down sharply during the period, he said they have possibly turned a short-term corner higher since then.
“It is unlikely that trade issues are responsible for the dramatic market softening in March. Rather, many of the underlying fundamentals are different between this year and this time in 2017 -- and different such that lower prices are to be expected,” he explained.
Most notable are the substantially higher cattle on feed numbers over 120 days, he said. Although it is well known that cattle inventories are higher, as are total cattle on feed, Koontz said the number of long-fed cattle is substantially higher this year than last.
“Last year, the market entered April with a very clean showlist. Not this April,” he said. “Consequently, while in seasonal decline, carcass weights are running ahead of last year. Both of these will limit upward potential for fed cattle.”
Koontz also noted that weekly fed steer and heifer slaughter volumes remain strong compared to last year, as do Saturday slaughter volumes. Packer margins are also stronger, he added.
“So, it is unlikely to continue to worsen,” he noted.
Koontz said it will be important to watch Saturday volumes through the remainder of April.
“Strong volumes will indicate solid featuring at retail, which, for the most part of this year, has been soft compared to last year," he said. "I am not optimistic that retail featuring will lead to much improved beef demand in the northern and central parts of the nation – with the cold spring solidly in place.”
Further, he said beef will clearly need to compete through the summer with larger volumes of chicken and pork, which also limits upward potential for cattle and calves.
Koontz said while it is unlikely that current trade issues are driving the fundamentals affecting cattle markets, it is also unlikely that these trade issues will result in meat trade and prices that favor producers.
According to the U.S. Department of Agriculture’s latest “Livestock, Dairy & Poultry Outlook,” weekly average prices for fed steers in the five-area marketing region fell from a mid-February price of $129.93/cwt. to $120.96/cwt to close out the first quarter. USDA economists Russell Knight and Lekhnath Chalise said beef demand during this time appears to have remained firm based on both higher beef production to date and higher year-over-year wholesale prices.
“Strong wholesale prices and lower fed steer prices have supported packer margins at a time when they should be seasonally declining,” they explained. “With the pending increase in fed cattle slaughter, steer prices are expected to trend even lower in the second quarter to $114.00-118.00/cwt.”
USDA recently lowered its price forecast for fed steers to $106.00-114.00/cwt. in the third quarter and to $108.00-118.00/cwt. in the fourth quarter.
The economists said feedlot operations, on the other hand, will likely push to keep fed steer prices from dropping further, but the growing volume of cattle on feed may make it a struggle. Still, they said feedlots will likely have to accept lower prices if they want packers to buy more cattle.
“On the input side of the equation, lower fed cattle prices and higher feed prices expected for the current marketing year will likely encourage feedlots to bid lower for feeder calves. However, many calves are already on feed due to poor winter forage availability, which likely limits the availability of feeder calves to be placed on feed,” Knight and Chalise said.
Additionally, they said producer decisions concerning heifer breeding in the spring will likely affect supplies.
USDA lowered second-quarter feeder calf prices within the range of $138.00-144.00/cwt., and third-quarter prices were reduced to $133.00-143.00/cwt.
What the technicals say
As for what the technicals indicate, Koontz said live cattle and feeder cattle contracts have plowed through support planes during the declines through March. Selling pressure was substantial and sustained, he explained.
“June live cattle broke supports at $110 and $104. I currently anticipate some level of correction higher but for all the contracts to continue to look for that lower price level than where the contracts started the year,” he said.
Koontz also pointed out that all live cattle and feeder cattle contracts posted a key reversal bottom on April 4. He said he is doubtful that this is a signal for a market bottom but, rather, higher prices with a correction in the short term.
“Further, $97 becomes firm support for June live cattle. My target correction for June is short of $110, but it’s less important to watch live and feeder cattle futures prices over the remainder of April and into May than it will be to watch boxed beef values, fed slaughter volumes and changes in long-fed inventories implied by this month’s 'Cattle on Feed' report,” he added.
Koontz said the U.S. is clearly set up for weaker cattle and beef prices this year compared to the market events of last year and added that fundamentals in place limit upward potential.
June live cattle futures were mostly higher this week before plunging Thursday. Contracts closed higher Monday at $104.175 and Wednesday at $105.275 before sharp losses Thursday brought them to $103.00/cwt.
May feeder cattle futures were mostly lower this week, closing Monday at $140.375 and Thursday at $138.425/cwt.
The Choice and Select beef cutouts closed lower at $211.34/cwt. and $198.48/cwt., respectively.
May lean hog futures started the week lower but gained as the week progressed. Nearby contracts closed Monday at $68.175/cwt. and Thursday at $70.150/cwt.
Pork cutout values were mixed this week. The wholesale pork cutout closed lower at $68.42/cwt. Loins and hams were higher at $69.84/cwt. and $54.92/cwt., respectively. Bellies also were higher at $91.49/cwt.
Hogs delivered to the western Corn Belt were higher, closing Wednesday at $54.86/cwt.
The U.S. Department of Agriculture reported the Eastern Region whole broiler/fryer weighted average price on April 13 at $1.0757/lb.
According to USDA, egg prices were steady, with a steady undertone. Offerings were moderate, while supplies were in a wide range of light to heavy, but mostly moderate. Demand was light to fairly good.
Large eggs delivered to the Northeast were sharply lower at $1.29-1.33/doz. Prices in the Southeast and Midwest also were lower at $1.40-1.43/doz. and $1.24-1.27/doz., respectively. Large eggs delivered to California were unchanged at $1.96/doz.
For turkeys, USDA said the market was steady to firm. Offerings and demand have been light to moderate. Prices for hens and toms were higher on the lower end of the range at 75-84 cents/lb.
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