Weekly Livestock Comments, July 1, 2016

– Andrew P. Griffith, University of Tennessee

FED CATTLE: Fed cattle traded $6 higher than one week ago on a live basis. Live prices were mainly $122 to $123 while dressed prices were mainly $195 to $196. The 5-area weighted average prices thru Thursday were $122.48 live, up $6.39 from last week and $195.94 dressed, up $8.17 from a week ago. A year ago prices were $151.36 live and $239.88 dressed. Prices exploded on Thursday in the live cattle market as trade was not delayed until Friday as is common place many weeks. This was a welcome sign for cattle feeders as they were more in fear of a price implosion than stronger prices. However, the price strength has greatly improved margins that are solidly in the black on a cash-to-cash basis. The summer months are usually pretty tough for fed cattle prices, and it would not be surprising to see weakness develop again the next few weeks. However, cattle feeders will sell on the higher market and capitalize on strong margins. If negative sentiment comes back in the market place the next few weeks, cattle trade could be delayed until late in the week again.

BEEF CUTOUT: At midday Friday, the Choice cutout was $208.66 up $0.22 from Thursday and down $5.34 from last Friday. The Select cutout was $193.58 down $1.43 from Thursday and down $4.80 from last Friday. The Choice Select spread was $15.08 compared to $15.62 a week ago. Packers are none too happy about the swing in prices as they were hit from both sides this week. Live cattle prices rose sharply while boxed beef prices struggle through the dog days of summer. Packers have had fairly strong margins for several months now so the shift in prices is not going to deal them a deathly blow, but it will put pressure on them to maintain strong margins. July may be beef month, but beef prices will likely continue to struggle. The hope is that retailers and restaurants are able to clear shelves over the extended weekend due to the celebration of Independence Day. If consumers flock to stores to gobble up beef instead of pork and poultry then the restocking process could help support beef prices the next couple of weeks. The one slowdown is that Independence Day is normally a hamburger and hotdog grilling holiday and not a middle meat holiday. Regardless, the beef industry would be glad to see product moving off the shelves this weekend so more product can take its place.

OUTLOOK: Producers and industry personnel often look to analysts and experts to provide insight into market prices over a short period of time. It is difficult to predict market prices over a short period because volatility in the market can greatly impact the final result during the short time span. Additionally, if these analysts and experts were that good at predicting the market then they would probably not be sharing that information but rather making trades to capitalize on their intellect or “good guessing.” However, these same experts are usually fairly consistent at identifying the direction of the market and supplying a range to the magnitude of the price change over a longer period of time. The use of historical trends, data, and expectations of human behavior assist experts in their analyses. So, as one considers the calf and feeder cattle market, the expectation was for calf prices to deteriorate through the summer and into the fall of the year following the spring price peak. Thus far, the market direction has performed as expected while the break in prices to this point has exceeded expectation. Based on Tennessee weekly auction averages, 500 to 600 pound steer calf prices have declined nearly $47 per hundredweight since their price peak in March. This precipitous decline has already met the expected decline into October and November calf prices. What does it mean from now until fall marketing? Calf prices will likely decline a little further, but the expectation is for the decline to slow through the rest of summer. Producers should understand that freshly weaned calf prices will look dismal compared to the past two years. On the yearling cattle side of the market, August feeder cattle future prices have strengthened about $7 the past couple of weeks after hitting a contract low on June 20th. Late July through early September tend to be the time of year with the strongest feeder cattle prices. Prices are not expected to fall apart the next couple of months so producers should consider marketing feeder cattle during this time period. The futures market is not pricing in much of a decline through the fall marketing months, but producers should be cautious of such information because there is a strong possibility that calf and feeder cattle prices will soften between now and late fall.

ASK ANDREW, TN THINK TANK: Sticking with last week’s theme of defining terms commonly used in this column, it may be beneficial to discuss the Choice Select spread. All beef has a grade, but not all is formally graded by USDA. Beef is graded based on a yield grade and a quality grade. The yield grade is in relation to external fat over the carcass while quality grade is based on intramuscular fat which is also called marbling. Quality grades for carcass beef are, starting with the highest quality, Prime, Choice, Select, Standard, Commercial, Utility, Cutter, and Canner. Most carcass beef for steers and heifers falls in the Choice and Select categories. In general, the higher the quality of beef, the higher the price. Thus, Choice beef usually brings a premium compared to Select beef which brings in the Choice Select spread. The Choice Select spread is simply the price of Choice meat minus the price of Select meat. The spread varies throughout the year based supply and demand factors throughout the year.