Looming beef supplies increase market uncertainty

Calf and feeder prices soften

Although demand remains strong for calves and feeders—especially cattle suited to grazing—bearishness surrounding looming late spring and summer supplies of fed cattle helped pressure Cattle futures and buyer psychology this week.
Early in the week, Cattle futures rallied with fundamental logic surrounding tight front-end supplies, climbing wholesale beef values and expanding packer margins. The bears squealed louder, though, seeming to disregard domestic and international consumer beef demand, which have so far enabled the industry to remain current amid increasing supplies of total red meat and poultry.
Feeder steers and heifers traded mostly steady to $5 per cwt lower last week, according to the Agricultural Marketing Service (AMS). However, there were instances of steady to $4 higher for cattle geared for summer turnout.
Feeder Cattle futures closed an average of $1.54 lower across the front half of the board, week to week on Friday, and then an average of 29¢ lower.
“In general, there is no reason to expect feeder markets not to follow seasonal tendencies,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his weekly market comments. “While there may be relatively fewer feeder cattle marketed in the March to May period, feedlot demand is likely to be somewhat muted as feedlots are quite full until some cattle are marketed. Thus, the overall demand/supply balance likely has not changed a great deal for the spring period.”
Peel is speaking to the increased late fall and early winter placements resulting, in part, from dry conditions that pushed cattle from wheat pasture early or prevented them ever going to pasture.
Moreover, unless it rains soon in winter wheat portions of the Southern Plains, Peel explains, “Wheat production prospects will decrease sharply and it is increasingly likely that wheat producers will terminate wheat and switch to a summer crop. Even if the wheat receives rain and begins to grow, it is unlikely that many producers will purchase new stockers for graze-out.”
Lightweight feeder prices typically peak in March, while heavyweight feeder prices usually increase from a February low heading toward a summer peak, Peel says.
Fed cattle trade about steady
Encouraged in part by the favorable basis, cattle feeders pulled the trigger early, starting in Nebraska on Tuesday. For the week, negotiated cash fed cattle trade was mainly steady at mostly $126-$127 per cwt on a live basis and at mostly $204 in the beef (Northern Plains).
“Following March forecasts of a decline back toward the upper one-teens, early second quarter fed cattle prices are expected to contain the 2018 peak before declining from mid-spring into early summer,” says Isaac Olvera, livestock and meat market analyst for Informa Economics IEG. “Feeding margins are expected to remain mostly profitable heading into the mid to late spring, but net returns are forecast to drop into the red once early summer comes.”
Currently, Olvera says IEG expects cattle feeding losses from early summer into the fall months as less favorable cattle swaps (current fed cattle price minus the projected breakeven of incoming placements) leave breakevens in the mid to lower $120s, against projected fed cattle prices in the sub-$110 area by fall.
More specifically, this month’s World Agricultural Supply and Demand Estimates project fed steer prices for the first quarter at $124-$127 per cwt. Projected quarterly prices for the remainder of the year: second quarter at $118-$124; third quarter at $110-$120; fourth quarter at $112-$122.
“Additionally, feeding margins deeper into 2018 may erode further on increasing feed costs, and a well-supported feeder market that is expected to hold into mid year,” Olvera says.
After 95¢ higher in spot Apr, Live Cattle futures closed mixed week to week on Friday, from an average of 24¢ lower to an average of 71¢ higher.
Wholesale beef values edge higher
Choice boxed beef cutout value was $1.62 higher week to week on Friday at $224.14 per cwt. Select was $2.62 higher at $217.26.
“Packer margins are very good and the incentive should be there to pick up the slaughter pace and procure fed cattle,” say AMS analysts. “Beef demand has been excellent but remains a critical factor going forward as more market-ready cattle become available for the April to June time period. These large numbers are also coming at a time when the grilling season and beef demand are historically at their best.”
Apparently, one potential demand wrench was avoided this week with President Trump excluding NAFTA trading partners, Canada and Mexico, from tariffs on imported steel and aluminum.
“Beef exports to Canada and Mexico, combined, represent approximately 25% of total beef exports,” says Nevil Speer, a contributing market analyst to BEEF, in a recent market review. “The value of those NAFTA exports are equivalent to roughly $75 per head.”
Total U.S. beef export value averaged $293.06 per head of fed slaughter in January, according to the U.S. Meat Export Federation. That was 14% more year over year (see below).
Increasing supply will shape the year
“Despite increases in both domestic beef consumption as well as beef exports, the USDA is projecting slightly lower cattle prices for 2018,” says Brian Williams, livestock economist at Mississippi State University, in the latest issue of In the Cattle Markets. “A big part of the reason for lower projected prices is the 5.9% increase in total beef production for 2018 (forecast), which would be a new record (27.7 billion pounds).
“USDA is projecting average steer (fed) prices for the year to be about 2% below a year ago. When combined with slightly lower corn prices, that should mean that this year’s margins in the cattle feeding industry should be relatively consistent with last year’s margins.”
Williams is referring to data shared at the recent USDA annual Agricultural Outlook Forum.
“The most important aspect on the supply side of the cattle industry comes back to the annual Cattle report released in January,” Williams explains. That report verified a fourth consecutive year of beef herd expansion, but also pointed to a slowing rate of expansion.
“Heifer retention is projected to be down 3.7% from a year ago, while the number of heifers expected to calve will be down 5.2% from a year ago,” Williams says. “However, these declines in heifer numbers are not necessarily an indicator of an industry contraction. Rather, it is likely an indicator of a slower rate of expansion.
“We really won’t see the industry begin to contract until the rate of culling older cows exceeds the rate in which replacement heifers are added to the herd. With such high replacement heifer retention over the last few years, I suspect we have a relatively young cattle herd nationally, which will help to keep the culling rate down over the next couple of years.”

U.S. beef exports continue higher

U.S. beef exports built on the previous year’s gains in January, with volume 9% more (105,486 metric tons) and value 21% higher ($624.4 million), according to data released by USDA and compiled by the U.S. Meat Export Federation (USMEF).
Beef export value in January averaged $293.06 per head of fed slaughter, up 14% year over year.
“January export results were solid overall and were especially strong for muscle cuts,” says USMEF president and CEO Dan Halstrom. “Despite the decline in variety meat volume, export value continued to increase. This underscores the important contribution variety meats deliver for producers and for everyone in the U.S. supply chain.”
Among January beef export highlights, demand continued to gain momentum in Asian markets.
For instance, exports to Japan were 7% more than the previous year in terms of volume and 19% more in value ($148.6 million). That included 30% more chilled beef volume, according to USMEF, while frozen beef exports declined 13%. Frozen U.S. beef entering Japan is subject to a 50% safeguard tariff, which is scheduled to revert back to 38.5% April 1, the beginning of the new Japanese fiscal year.
Similarly, exports to South Korea, which reached a record $1.2 billion in 2017, increased 13% from a year earlier for volume and 34% for value ($122.3 million).
According to USEMF, via the Korea-U.S. Free Trade Agreement (KORUS), the duty on U.S. beef was reduced to 21.3% Jan. 1, about 5 percentage points lower than Australia’s rate for this year and down significantly from the pre-KORUS rate of 40%.

Incidentally, U.S. beef exports to China, which resumed in June after a 13-year absence, hit a new monthly high of 819 metric tons in January, valued at $7.5 million.

CATTLE MARKET WEEKLY by Wes Ishmael

Calf-Feeder Trade

Regional Steer Price Average

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CME Feeder Index

CME Feeder Cattle Futures

CME Live Cattle Futures

CME Corn Futures

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