A dollar per pound.
A hundred bucks per hundredweight.
The week of April 10 prices for fed cattle across the
nation—217,000 head—charged to and a little past that magical
century mark. A couple of weeks earlier, some in the northern
region did. Since then, prices have retreated a few dollars but
are expected to see $100 again this spring.
Spun differently, fed cattle prices
the first week of April were running $17-$20/cwt. more than the
same period in 2006. Calves were selling at about the same level
as the year prior, while yearlings were up $5-$10, according to
the Agricultural Marketing Service.
You could see the upswing in fed cattle prices coming, but the
degree to which supply fundamentals can push the market is
always amazing. The full effects of continuing year-to-year
declines in carcass weights due to blizzard-losses and high
grain prices are finally coming to the fore.
At the annual meeting of the
Texas and Southwest Cattle Raisers Association (TSCRA) April 1,
Randy Blach, Cattle-Fax executive vice president pointed out
average carcass weights increased 12 lbs. per carcass for the
past two years. That was the equivalent of adding 2% more beef
production each of those years. This year, between the winter
and corn prices, carcass weights are declining.
So, at about the same level of
demand there just isn’t as much supply. Retailers fearing
tighter supplies later this spring have been pushing boxed beef
prices. Price
Perspective
Analysts with the Livestock Marketing Information Center (LMIC)
point out cash market prices on a daily basis haven’t approached
the record highs achieved in the last quarter of 2003.
In October that year steers
reached $113.83, based on the five-market average used by the
National Agricultural Statistics Service; $116.94 for steers
grading better than 65-80% Choice. The fourth quarter average
that year was $97.57. That was back when BSE pulled Canadian
cattle from the international export market, and before U.S.
cattle suffered the same fate.
“On an annual basis, record high
fed steer prices occurred in 2006; the 5-market average for
steers was $85.94,” says LMIC. “This year current forecasts call
for new record high annual average slaughter steer prices. For
the year, steers could average about $90, up about 5 percent
from last year. But setting new record high daily cash levels
will not occur without some additional spark. Setting a new
record high quarterly average fed cattle price might happen in
2007 and is even more likely in 2008.”
The more cynical in the crowd might
view this period of cattle history like the nation’s Roaring
20’s ushering in the Great Depression. The logic being that
cowherd expansion, coupled with record high breakeven
prices—courtesy of corn—and slipping domestic demand will spawn
a gargantuan downturn in the calf and feeder markets.
Aligning the Stars
As always, domestic beef demand is key. It has pushed cattle
prices into the new price plateau enjoyed by producers. Going
the other way, it could certainly crash the party. The fact is,
through the end of 2006, as measured by the industry’s retail
beef demand index (BDI), domestic demand has slipped for two
straight years.
As for herd expansion, based on
cow slaughter so far this year there are plenty of reasons to
believe there will be little if any expansion in 2007. That
means, even if grain prices and breakevens continue to escalate,
feedlots will likely be limited in how much they can take off
feeder prices. Corn is even
more of a wild card than usual because of ethanol wonderments
and some of slimmest year-to-year carryovers in years.
On the one hand, USDA’s initial
report of planting intentions released March 30 estimates that
producers will plant 95.5 million acres of corn this year.
That’s 15% more than last year and the most since 1945.
Iowa and Illinois which churn out
the most corn each year each are adding over 1 million acres of
corn for totals of 13.9 million acres and 12.9 million acres,
respectively. According to the report, producers in Nebraska and
North Dakota are also aiming to plant approximately 1 million
more acres. Much of the
increased corn planting, as expected, is coming from soybean
ground. According to the report, producers intend to plant 67.1
million acres of soybeans, 11.1% less than last year.
Cotton planting is expected to
decline 20% to 20.1 million acres.
All wheat plantings are estimated to
increase 5% to 60.3 million acres. Of that, 44.5 million acres
of winter wheat reflects 10% more.
Incidentally, if results of a recent
survey by USDA are correct, 84.4% of the acres currently
enrolled in CRP—with contracts set to expire between 2007 and
2010—will be re-enrolled. These contracts account for
approximately 27.8 million acres.
More specifically, participants
indicate they will pull about 4.6 million acres out of CRP. Of
these, approximately 1.4 million acres are located in major corn
producing states, according to USDA.
Of course, acres planted say nothing
about the crop.
The last several corn crops have
been records, yet carry-over has remained razor-thin. Given the
added demand from ethanol, less than expected corn production at
this stage of the game could drive corn prices so far and fast
that feeding cattle would make sense only if those cattle were
discounted drastically heading into the yard compared to today’s
prices.
This is true even though the bloom has already been fading from
the rose of domestic ethanol expansion.
The Food and Agricultural Policy
Research Institute looks for ethanol prices to continue dropping
through this decade—presumably the result of production
outpacing demand.
Then there’s the whole logistics puzzle. According to Roger
Ginder at Iowa State University last fall, grain storage in Iowa
would have to double from what it is currently over the next
several years to meet the expected increased production by 2010;
corn takes up more space than the soybeans additional acres of
corn are expected to replace. That’s just grain storage and in
one state. Ginder goes on to mention the impending bottleneck in
rail and highway trucking capacity.
Bill Holbrook from Exporter
Network—a grain market analysis firm—told folks at the TSCRA
meeting that some of the larger ethanol players are already
putting some of their new-construction plans on hold; capitol
costs of construction are increasing 1.0-1.5% per month, while
profit expectations decline.
None of this is saying ethanol isn’t
changing the cattle business—it will and it already
has—considering how many dollars have been shucked from calf
prices. Those prices are still among the highest in history, but
given the supply fundamentals, they’d be higher if it wasn’t for
ethanol subsidies pushing up breakevens.
Still, it seems a stretch to
expect ethanol production to grow as fast as some suggest. It
seems just as iffy that Bush’s goal for 35 billion gallons of
alternative liquid fuel by 2017 will be achieved.
That brings us to the calves.
Speculation and odds favor the fact that in order to combat the
sky-high breakevens associated with calf-feds, feedlots will be
looking to bring cattle into the yards with more weight on them.
According to the annual Focus on
Feedlots survey from Kansas State University steers were on feed
an average 158 days in 2006 which was about seven days longer
than in 2005, while heifers were on feed an average two days
more at 152 days.
“Feedlots reported the cost of gain for steers in 2006 at $53.94
per hundredweight, only $0.83 per hundredweight higher than in
2005 but $3.52 per hundredweight higher than the 2001-2005
average,” says the report. “Heifers closed out at an average
$57.10 (cwt.), $1.40 per cwt. higher than 2005’s average. For
2006, feedlots reported an average corn price of $2.77 per
bushel, only $0.33 per bushel higher than 2005’s average as
prices did not surpass the $3 per bushel mark until late in the
year. Alfalfa hay at an average $109.39 per ton in 2006 was the
highest annual price reported thus far in the survey (began in
1992). Compared to 2005, hay prices in 2006 were over $33 per
ton higher and were nearing $140 per ton in December.”
There’s also reason to believe
feedlots will seek to take ownership of cattle ahead of the
feedlot sooner in order to dilute the added losses that come
with the lower average occupancy rate that results from having
cattle on feed for fewer days.
Bottom line, as excess cattle feeding capacity and beef packing
capacity continue to chase limited cattle numbers, there’s every
reason to believe the market can retain some steam. |
