Caution holds calf and feeder prices in check

Cash fed cattle prices and the steamy run-up in wholesale beef values offered market support this week. Buyers were reluctant to push calf and feeder prices much higher, though, amid continued uncertainty relative to domestic and international demand as supplies grow with the nation’s herd expansion.

Calves and feeder cattle traded unevenly steady, from $2 per cwt higher to $2 lower, according to the Agricultural Marketing Service (AMS). Analysts there note that trades in the Southeast were mostly on the upper end of the range.

“The deferred CME Live Cattle contracts are tempering the feeder cattle market,” AMS analysts say. “When the Feb Live contract went off the Board, the August contract was at a 20% reduction. For a 1,500-pound steer, that would be about $400 per head drop in value, so it could be a challenge for feeder cattle at auction to increase tremendously in value at this time.”

Feeder Cattle futures closed an average of $2.02 higher week on Friday ($1.32 to $2.55 higher).

“There is little to no reason to have a bearish outlook on feeder cattle heading into spring and summer,” says Andrew P. Griffith, agricultural economist at the University of Tennessee, in his weekly market comments. However, he adds, “Feeder cattle futures appear to be undervaluing the animals, but that is supported by the undervalued live cattle futures…Feeder cattle futures are sure to experience some volatility as prices generally experience a short, seasonal price decline before finding support heading into April.”

Boxed beef values charge ahead

Cash fed cattle sold mainly steady to $1 per cwt higher this week, buoyed by the highest wholesale beef values since last summer with packers apparently scrambling to keep up with buyers who are aggressively building supplies.

“A short supply of front-end fed cattle created an issue for the packers again this week,” AMS analysts explain. They add that there were reports of some cattle feeders taking the price for deliveries more than two weeks out, due to the exceptional basis opportunity.

Negotiated cash fed cattle prices were $124-$125 per cwt in the Southern Plains, $126 in the Northern Plains and up to $127 in the western Corn Belt. Dressed trade was $4 higher at $200.

Live Cattle futures were an average of $1.68 higher week to week on Friday ($1.02 to $1.95 higher).

Choice boxed beef cutout value was $9.11 higher week to week at $208.07 per cwt on Friday. Select was $8.57 higher at $204.05. Over the last two weeks, Choice boxed beef cutout value is up $17.58 and Select is up $14.81.

Drivers of such a steep climb in wholesale beef prices likely include increased momentum in exports, increased beef featuring, snugger net international supplies, favorable grilling weather earlier across wide swaths of the nation and perhaps increased domestic demand.

“Most of the support is coming from the loin and rib cuts as restaurants, grocers, and foodservice entities look to secure product earlier than normal,” Griffith says. “The increased interest in the middle meats means more focus is being shifted to Choice meat rather than Select grade meat, which will continue to widen the Choice-Select spread if the current trend continues. It is a little difficult to understand why retailers are aggressively purchasing product considering the lower expected price in the future… Fundamentally speaking, retailers are probably making the correct decision considering the increases in beef exports and strong domestic beef demand the market has witnessed the past several months.”

“Tonnage of beef exported by the U.S. in 2016 was up 12.6% compared to 2015’s rather depressed level,” say analysts with the Livestock Marketing Information Center (LMIC), in the latest Livestock Monitor. “In 2016, beef imported tonnage dropped 10.5% year-over-year.”

Headwinds linger for U.S restaurants

“As goes the U.S. quick service restaurant (QSR) segment, so goes the total foodservice industry,” say analysts with The NPD Group (NPDG). They explain QSRs, which represent 80% of total commercial foodservice visits, realized no traffic growth in 2016, while total foodservice traffic dipped slightly.

Visits to full service restaurants, which combined represent 20% of total industry traffic, declined last year, too, according to NPDG’s daily tracking of consumers’ use of restaurants and other foodservice outlets.

The 2% decline in lunch visits—the primary traffic period—at QSRs and all other food service outlets was a key contributor to the slump in traffic, according to NPDG.

The latest National Restaurant Performance Index (RPI) maintained by the National Restaurant Association (NRA) continues to point to lingering headwinds as well.

Due mainly to weaker results among current situation indicators, the RPI in January was 0.4% less than December at 100.1.

For perspective, RPI index values above 100 indicate a period of expansion, while values below 100 indicate a period of contraction, relative to key industry indicators.

Restaurant operators also reported a pullback in capital spending activity in recent months, according to NRA.

“The dynamics that have driven the foodservice industry for all these many decades are changing and changing quickly,” says Bonnie Riggs, NPDG restaurant industry analyst. “As I’ve said many times before, there will always be a need for foodservice but there is a shift in consumer attitudes and behavior and the landscape is different. Operators and manufacturers need to heed the changing dynamics and adjust their strategies accordingly.”

The total number of U.S. restaurants decreased by 2% last year to 620,807 units, according to a count of U.S. commercial restaurant locations compiled each spring and fall by NPDG. Independent restaurants declined by 4%, while chain restaurant counts increased by 1% last fall.

With the decline in restaurants, NPDG analysts say restaurant density (units per million population) is at its lowest level in the past 10 years.

“This is the most significant drop in total U.S. restaurant counts since the recession,” says Greg Starzynski, director-product management, NPDG Foodservice. “If consumers continue to reduce their restaurant visits, we expect the number and density of restaurant units will continue to decline in response to the lower demand.”

Though U.S. foodservice traffic isn’t growing, there were still close to 62 billion visits made to restaurants and other foodservice outlets last year, say the folks at NPDG. QSR consumer spending increased by 3% and by 2% for the total industry.

All spending gains were driven by an increase in average eater check size. Other industry bright spots last year were the continued strength of morning and afternoon snack, drive-thru visits, combo meal deals, and an increase in breakfast food servings.

Trend continues toward heavier feedlot placement weights

Prior to 2012, Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, explains the annual average percentage of heavy placements (cattle weighing more than 800 pounds) each month was fairly constant at about 28%. Since 2012, the percentage of heavyweight placements increased to last year’s average of 36.8%.

“The increase in heavy-weight feedlot placements in recent years was no doubt heavily motivated by high feedlot cost of gain over much of the period,” Peel explains. “However, even with sharply lower feed costs in 2017, there are several reasons that placement weights may not decline much in the coming months.”

Feedlots generally prefer to feed older, heavier cattle, which is more possible with growing cattle numbers. Continued changes in cattle genetics, feeding management and feeding technology allow cattle to be fed efficiently to heavier weights. Placement of heavier animals in feedlots may also be contributing to the increase in the Choice-grading percent in recent years, he says.

Plus, Peel explains placement weights drive finished weights by different degrees. Sharing the analysis of data from more than 500,000 cattle fed at a feedlot in the Southern Plains, Peel explains that for steers placed between 600-850 pounds, each additional pound of placement weight increases sale weight by an average of 0.52 pounds. At weights heavier than 850 pounds, each additional pound of placement weight increased sale weight by 1 pound.  

“A similar but even more exaggerated pattern is true for heifers, with placements between 550-800 pounds producing an average of 0.48 pounds of sale weight for each additional pound of placement weight,” Peel says. “For heifers placed at weights over 800 pounds, each additional pound of placement weight results in 1.38 pounds of additional sale weight.”

Longer term, Peel expects slaughter and carcass weights to increase at a slower pace or to plateau. In part, he says it’s due to demand limitations for ever-larger carcasses.

CATTLE MARKET WEEKLY by Wes Ishmael

Calf-Feeder Trade

Regional Steer Price Average

North Central

South Central

Southeast

CME Feeder Index

CME Feeder Cattle Futures

CME Live Cattle Futures

CME Corn Futures

CME Oil Futures