BIG Cattle on Feed Inventory and Cattle Market Keys Moving Forward

BIG Cattle on Feed Inventory and Cattle Market Keys Moving Forward

The large inventory of feed cattle that have been placed in the feedyards has begun to affect the price of feeder calves. How large an impact will depend on consumer demand. Credit: Chris Prevatt, UF/IFAS

Cattle on Feed Report

On Friday, September 21st the monthly USDA-NASS Cattle on Feed Report was released. According to the U.S. Department of Agriculture the number of cattle and calves on feed (Feedlots with 1,000 head or more capacity) for the slaughter market in the United States on September 1st was 11.125 million head, 5.9 percent above Sept. 1, 2017. This is the largest September inventory since the series began in 1996. The monthly cattle on feed inventory not only increased year-over-year, but month-over-month with 32,000 more cattle on feed since the August 1st inventory report. Additionally, this is the fourth month in a row where a monthly record has been set for the number of cattle and calves on feed for the slaughter market. A twelve-month moving average of monthly feedlot inventories shows that, over the last year, feedlots have had the largest average feedlot total since 2007. Placements in feedlots during August totaled 2.07 million head, which was 7 percent above August 2017. Net placements were 2.02 million head. Marketing of fed cattle during August totaled 1.98 million head, slightly above the 2017 total.

Keys for the Beef Cattle Market

The cattle on feed report did not create a positive short-term outlook, as it continues to provide bearish information for supply fundamentals. Beef production is on track to reach a record level of 27.1 billion pounds in 2018, up 3.6 percent year over year. For the year to date, beef production is up 3.0 percent year over year. However, fourth quarter beef production is expected to be about 4.0 percent larger than last year.

From the demand side of things, a strong domestic economy and robust exports have continued to support beef and cattle prices during 2018, against record large U.S. beef production and all-time highs in competing meats (pork and poultry). Packing business margins continue to be good. Therefore, packers have great incentive to keep processing as many head as possible to take advantage of margins. Good retail demand and packer margins will be needed to keep the market moving along at a good pace during the last quarter of 2018.

There are many unknowns and potential headwinds for cattle markets during the next 12-18 months. Any weakness in the domestic or global economy compared to the conditions of the last two years would dampen demand for beef and thus cattle. Therefore, two of the keys for maintaining prices moving forward will be for the U.S. economy and export markets to continue growing. These two factors will be challenged by the cycle of tariffs and retaliation. Futures markets may begin to react more aggressively to political announcements that may or may not materialize into price changes. Demand for U.S. beef is critical to the success of U.S. cattle producers. Export markets can take a very long time to materialize, but can be lost very quickly.

Will Feeder Calves Maintain Their Price Levels Through the Fall?

Will Feeder Calves Maintain Their Price Levels Through the Fall?

Cattle prices have struggled to move higher as beef supplies have been increasing. During the 3rd and 4th Quarter record supplies of animal proteins (beef, pork, and poultry) will continue to be harvested. Cold storage levels for all meat proteins are either at or above 2017 and 5-year averages. These supplies will be a price-limiting factor, despite extremely strong export beef demand. Additionally, losses at the feedlot level are mounting and expected to continue into the fall dampening overall price bids for replacement feeder calves.

Figure 1 looks at 550 pound Florida Feeder Steers for 2016, 2017, and 2018.

As shown in Figure 1, 2016 feeder calf prices (red line) maintained their price level early before severely declining over the second half of the year as meat protein supplies exceeded demand. During 2017, feeder calf prices (blue dashed line) never weakened moving from summer into fall as exports improved throughout the year. The stabilization in price during the second half of 2017 was unusual, as seasonal weakness typically occurs during the fall as feeder calf supplies reach the peak. However, exceptional export beef demand kept prices above 1st half 2017 levels. Thus far, the 2018 feeder calf market has continued to maintain prices at or above 2017 prices levels. The price range for 2018 Florida 550 pound Feeder Steers has traded in a $26/cwt. ($178 – $152/cwt.) or $143/head ($979 – $836/head) range. While, that dollar value may seem large, a comparison over the past few years proves that 2018 has been less volatile. Looking forward at the 2018 fall calf market, a quick look at the headlines reveals the uncertainties that exist around tariffs and trade agreements. Therefore, there is risk to calf values as producers look at marketing their animals this fall.

Figure 2 shows the 10-year seasonal price index for U.S. 550 pound Feeder Steers (2008-2017). The price index is simply a ratio of the monthly average prices to the yearly average price over 10 years. The price index ranges from 0.95 in November to 1.04 in June. The price index provides us with a relationship of how prices change during the year based on a 10-year history. The 10-year price index suggests that feeder steer prices increase in price from January through June, and declines significantly from July through November, and begins to slightly increase during December.

Thus far in 2018, cash feeder steer prices have closely followed the seasonal price trend. As seen in Figure 2, a decline in feeder steer prices during the fall months is normally expected due to the larger number of calves coming to town.

If Florida Feeder Steers prices follow their seasonal price trend during the second half of 2018, then calf prices will decline this fall. Given the assumption that Florida 550-pound Feeder Steers followed this seasonal trend, the realized Florida 550-pound Feeder Steer market price in November would be approximately $142/cwt. ($155/cwt.*(0.95/1.04)). Thus, the 10-year index expects a typical price break from summer (June) to fall (November) of $13/cwt. ($155-$142/cwt.) or $72/head.

If the above scenario is followed, producers may consider selling feeder calves earlier to avoid the fall price declines. Also, for those selling in truckload units, they may consider pre-selling (forward contracting) feeder calves for fall delivery.

Answering the question “Will Feeder Calves Maintain Their Price Levels Through the Fall?” will help you decide when to market 2018 feeder calves. Based on the long-term trends of the feeder calf market, producers should expect prices to decline from July to November. Producers seeking higher income for feeder calves held for fall delivery should consider forward pricing to protect their investment while adding additional pounds.  Good luck marketing your 2018 feeder calves.

 

Is it Profitable to Add Weight and Sell Heavier Feeder Calves this Year?

Is it Profitable to Add Weight and Sell Heavier Feeder Calves this Year?

The feeder calves with the greatest value are almost always the heavier calves, but producers must calculate if it is profitable for them to own the cattle longer, and provide the resources to add the additional weight.  Photo Credit: Chris Prevatt

Last spring I wrote an article entitled “At What Weight should I sell my Feeder Calves” that bought forth many questions on the value of each additional pound of gain. This article will serve as a follow-up to revisit the value of gain, and share the calculation for producers to use to evaluate their individual situation.

The feeder calves with the greatest value are almost always the heavier calves. The question that producers must answer for themselves is “Will it be profitable to add the additional weight and sell heavier feeder calves?” They can accomplish this by calculating the value of gain of their feeder calves.

For cow-calf producers, value of gain (VOG) is the net dollar value after the price slide of light to heavy feeder calves has been calculated. Calculating value of gain assists producers in looking ahead at potential marketing opportunities and allows them to carefully evaluate their production plans. However, it ultimately helps producers determine the optimal weight to market their feeder calves.

To calculate the value of gain, the total dollar value per head in the beginning is subtracted from the total dollar value per head at the end. The net dollar value per head is then divided by the pounds of gain per head to determine the value of gain per pound.

Below is an example of how producers can calculate value of gain (VOG). The prices used for this analysis were for 425-pound and 575-pound Feeder Steer Calves (Medium and Large Frame, #1 Muscle Score) from the USDA Florida Cattle Auctions Weekly Summary for the week ending April 13th, 2018.

Producers should consider taking the time to calculate their expected value of gain to help decide the optimal weight to sell their feeder calves. It’s important for producers to know their value of gain, because to make money, the value of gain needs to be greater than the cost of gain. Once a producer has calculated their value of gain, they must evaluate whether or not they can increase their returns by adding additional weight to their feeder calves. In the example above, a producer would need to add the 150 pounds per feeder steer for less than $126/head or $0.84/pound to add profit to their operation. There are many methods to add weight to feeder calves that vary considerably. Producers must analyze their individual situation to determine if the value of the additional pounds will be greater than the cost of gain.

Additionally, please note that the price of the calf sold ($1.55/lb.) is more than the value of gain per pound ($0.84/lb.) in the example above. It’s important to understand that their feeder calf value of gain is not the same as the market price received, due to the price slide associated with marketing heavier animals. The only time that the value of gain per pound would be equal to the market price per pound is when there is no difference in price per pound between different weights of feeder calves.

Feeder calf value of gain is a sensitive variable and can change frequently as changes in fundamental supply and demand variables influence the beef cattle market. For example, value of gain can vary greatly from weight class to weight class making it very important to calculate the value of gain of all weight classes, before adding additional weight to your feeder calves. Therefore, producers should evaluate value of gain regularly as they prepare to market their feeder calves in 2018 to be more profitable.

 

March Florida Cattle Market Price Watch

March Florida Cattle Market Price Watch

The August 2018 Feeder Cattle futures contract decreased by $11.30/cwt. during March. Based on this futures price decrease, August Feeder Cattle revenues decreased by approximately $90.40/head ($11.30/cwt. * 8.0
cwt.) on an 800-pound feeder steer, which amounts to $5,650.00/truckload (50,000 lbs.). The August Feeder Cattle futures contract high, contract low, and price range since September 2017 are $159.10, $139.80, and
$19.30/cwt., respectively. The price range of $19.30/cwt. on an 800-pound feeder steer totals $154.40/head and $9,650.00/truckload.

  1. The breakeven price was estimated to be $714.13/head or $129.84/cwt. ($714.13/head divided by 5.50 cwt.).  The breakeven price includes variable and fixed production costs of $419/head and $295/head, respectively.
  2. The price objective was estimated to be $864.36/head or $157.16/cwt. ($864.36/head divided by 5.50 cwt.).  The price objective includes production costs of $714/head, family living withdrawal ($100/head), and growth
    capital/retirement ($50/head).
  3. The expected cash price is equal to the daily August 2018 Feeder Cattle futures closing price plus an expected August 2018 South Florida 550 lb. Feeder Calf Basis of $2/cwt.

 

February Florida Cattle Market Price Watch

February Florida Cattle Market Price Watch

The August 2018 Feeder Cattle futures contract decreased by $0.58/cwt. during February. Based on this futures price decrease, August Feeder Cattle revenues decreased by approximately $4.64/head ($0.58/cwt. * 8.0 cwt.) on an 800-pound feeder steer which amounts to $290.00/truckload (50,000 lbs.). The August Feeder Cattle futures contract high, contract low, and price range since September 2017 are $159.10, $139.80, and $19.30/cwt., respectively. The price range of $19.30/cwt. on an 800-pound feeder steer totals $154.40/head and $9,650.00/truckload.

  1. The breakeven price was estimated to be $714.13/head or $129.84/cwt. ($714.13/head divided by 5.50 cwt.).  The breakeven price includes variable and fixed production costs of $419/head and $295/head, respectively.
  2. The price objective was estimated to be $864.36/head or $157.16/cwt. ($864.36/head divided by 5.50 cwt.).  The price objective includes production costs of $714/head, family living withdrawal ($100/head), and growth capital/retirement ($50/head).
  3. The expected cash price is equal to the daily August 2018 Feeder Cattle futures closing price plus an expected August 2018 South Florida 550 lb. Feeder Calf Basis of $2/cwt.