LIVESTOCK MARKETS: Cattle markets can recoverLIVESTOCK MARKETS: Cattle markets can recover
Feedlot marketings more current, and retail beef prices should come down, so there is renewed hope for recovery in cattle prices.
July 26, 2016
Purdue University livestock economist Chris Hurt said lower cattle prices have been the story this spring and summer.
“Beef supply has been large due to heavy placements of heavy calves and the beginning of more females coming to market as herd expansion may be slowing,” he said. “Retail beef prices have been slow to come down, and this has limited consumer purchases of beef in relation to abundant pork and poultry supplies.”
Finished cattle prices have been on the skids since mid-March, when prices reached near $140/cwt. Last week, prices fell to around $115. The futures market has noticed the bearish theme in the cash market and suggests that prices will drop another $5 by the end of this year and proceed downward to near $100 by next summer.
“There are plenty of reasons why prices have fallen, the biggest being a large number of cattle coming out of feedlots in recent months,” Hurt said. “That story goes back even further to abundant grass, which encouraged cow/calf operations and backgrounders to add more weight to calves before they entered the feedlot. As a result, there has been a shift to heavier-weight placements.”
In the first half of this year, placements weighing 800 lb. and more represented a record 40% of all placements, which compares to a longer-term average of around 27%. Rapid placements of heavy calves caused marketings out of feedlots to increase 5% in May and then a sharp 10% in June.
Contributing to higher recent marketings has been a shift to lower slaughter weights since May, which Hurt said has served to “pull cattle forward." This shift to lighter weights is probably related to the falling finished cattle prices and feedlot managers' desire to get cattle to market before prices dropped even more, he said.
Because of these heavy marketings, beef production increased 5% in May and then 10% in June compared to the same month in the previous year. The rapid marketings have reduced the total number on feed to just 1% higher than year-ago, according to the U.S. Department of Agriculture’s July “Cattle on Feed” report. This should help ease the burdensome volume of cattle and encourage upward price movement, Hurt suggested.
Additionally, Hurt said there are early signs that the expansion phase of this cattle cycle could be in the process of slowing.
“Lower finished cattle prices and extremely weak futures prices may be causing cattle producers to rethink any additional expansion plans," he said. "The calf prices implied by $100 finished cattle is simply not profitable for most cow/calf operations. If producers slow the rate of expansion, then this means more females move to market, providing added beef supply pressures to already declining cattle prices.”
The sign of slowing expansion is in the rate of increased female slaughter, Hurt noted. In June, the number of heifers processed was up relative to year-ago levels for the first time in several years. Additionally, the number of beef cows processed in both May and June was up about 18%. For June, total females (heifers and all cows) processed increased 7% from year-earlier numbers.
“The total number of females in the processing mix remains low, so it is still too early to say this expansion phase has come to an end," Hurt said. "However, these signs of higher numbers of females in the processing mix may be the first clues of what is to come.”
Retail beef prices falling slowly
Retail beef prices haven’t fallen enough to encourage consumers to buy the added beef supplies. In June, USDA reported that the composite retail beef price was $6.20/lb., which compares to a record-high price of $6.41/lb. in May 2015. As such, recent retail prices have been only 3% lower than the record high. In contrast, Hurt noted that June retail pork prices were down 11% from their high.
“Farm-level prices normally drop quickly, but retail prices are much slower to decline. This means the current margin between the farm price and the retail price is at a record-wide level,” he said, adding that packer margins are likely at record-high levels, as well.
“As retail prices adjust downward over time, consumers will have more price incentives to buy beef, and this could actually help strengthen farm-level prices,” Hurt explained.
Signs of recovery
With the number of cattle on feed only 1% higher on July 1, Hurt said there should be renewed hope for recovery in cattle prices. Lower marketing weights mean that feedlot managers are more current in their marketings. Additionally, Hurt suggested that retail beef prices also should come down, which will serve to narrow packer margins but improve farm prices.
Prices of finished cattle are expected to be roughly $113 to higher in the third quarter then move upward to around $118 to the low-$120s/cwt. this fall.
Recent live cattle futures prices have been extremely depressed, which Hurt said sends signals of much lower cash prices next year.
“While prices are expected to be lower next year, they may not be as low as suggested by futures. Still, cow/calf managers will want to continue to be cautious about further expansion of the brood cow herd.” Hur said.
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