In a short week of trade, finished cattle prices continued to increase sharply. Cattle feeders have gained leverage over packers as the number of cattle ready for slaughter has declined and as the number of cattle on feed has declined. By Andrew P. Griffith,
Cattle feeders have been pushing cattle out of pens for several months now which contributed to some of the price decline that was experienced the past several months. However, the pulling forward of those cattle has set the market to experience higher prices as fewer cattle are available for marketing.
The market has been setting itself up for this situation for some time now. At the same time cattle numbers are heading down, cattle weights are declining which should also support fed cattle prices the next several weeks.
BEEF CUTOUT: At midday Friday, the Choice cutout was $187.79 up $1.15 from Thursday and up $4.50 from last Friday. The Select cutout was $171.27 up $1.15 from Thursday and up $3.81 from last Friday. The Choice Select spread was $16.52 compared to $15.83 a week ago.
Wholesale beef prices witnessed modest gains through the week as the Thanksgiving holiday came to a close. Ham promotions generally become the focus leading up to Christmas, but retailers have been featuring beef in many parts of the country.
Supplies of beef are expected to tighten the next several weeks due to reduced slaughter levels and reduced slaughter weights. Packers have been experiencing strong margins for several months which has supported pulling cattle forward. Beef prices are generally supported heading into the holiday season and the expectation is for Choice beef prices to have a little more upside. However, packer margins will likely tighten as the fed cattle price is expected to outpace the increase in beef prices the next several weeks.
The price escalation in wholesale beef will be short lived as Choice beef prices will experience a rapid decline by the first of the year. Consumers will begin purchasing more end cuts instead of middle meats which will support Select beef prices relative to Choice beef.
OUTLOOK: The calf and feeder cattle market have been making a late season run the past several weeks that contradicts the seasonal tendency. The increase in prices supports an earlier statement that the market had undervalued calves and feeder cattle.
Cattle markets work much like a pendulum in that they swing back and forth. Sometimes the pendulum swings too far one way which results in it swinging back to far the other way. Cattle were overpriced in 2014 and 2015 and late summer and early fall of 2016 was part of the swing the other way.
There is a good chance that calf and feeder cattle prices will continue to be supported through the end of the year and into the early spring months as grass fever takes hold of the market. The one drawback is the Southeast which continues to battle drought conditions. The drought conditions have forced producers to feed hay earlier than anticipated and has resulted in many surface water resources being depleted.
Similarly, the drought conditions have put a halt on stocker cattle purchases by many in the Southeast that traditionally graze small grains. One could only imagine that calf prices would be a little higher than their current level if drought were not in full control. The drought may have even larger implications for the spring months as many pastures have been partially or completely grazed to the ground. Though the area is dry, grass will remain a key resource in the Southeast United States and will result in continued strong production if calf prices remain relatively strong.
Cow-calf and stocker producers should both be thinking about management decisions that could improve the enterprise during these dry periods. The establishment of improved water systems and diversified feed resources would be two key management areas. Profitability is always impacted by cattle prices, but producers will witness greater rewards from cost management decisions and improved resource management. Producers should continue to consider value added practices to increase marketing flexibility.
ASK ANDREW, TN THINK TANK: A question came in early in the week about enterprise budgets. The cow-calf and stocker budgets for 2017 are in development and will hopefully be finished by the middle of December. These budgets can be downloaded from the internet as either an Excel file or a PDF. The Excel file can be edited by the user of the file to closely match the actual operation. It is always a wise decision for producers to consider establishing a budget at the beginning of each year to determine potential costs and revenues. This process can serve many purposes, but it always benefits management decisions. Row crop budgets will also be ready and available around the same time.
Please send questions and comments to email@example.com 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 –December $110.75 +1.08; February $112.20 +1.40; April $111.58 +1.18; Feeder cattle –January $127.23 +2.33; March $123.35 +2.48; April $122.75 +2.30; May $121.65 +1.98; December corn closed at $3.49 down $0.02 from Thursday.