Weekly Livestock Comments, July 22, 2016

– Dr. Andrew P. Griffith, University of Tennessee

FED CATTLE: Fed cattle traded $2 to $3 lower compared to a week ago on a live basis. Live prices were mainly $113 to $115 while dressed trade was mainly $183 to $185. The 5-area weighted average prices thru Thursday were $114.65 live, down $2.35 from last week and $184.83 dressed, down $2.59 from a week ago. A year ago prices were $145.40 live and $232.03 dressed. Cattle feeders are walking a tight rope as fed cattle prices continue to decline. Feeding margins could be positive or negative depending on the yard, but it is doubtful anyone is making landslide profits. It will be difficult for cattle feeders to do much about improving margins on nearby marketings, but they are certainly looking into the future. The expectation is for prices to reverse direction within the next few weeks, but the magnitude and speed of that turn around may be disappointing to many in the industry. As large numbers of cattle continue to be harvested, cattle feeders will continue to look for cattle to fill pens. The refilling of pens should support feeder cattle prices in the near term but fears of large numbers this fall will slow positive price movement.

BEEF CUTOUT: At midday Friday, the Choice cutout was $200.36 down $0.34 from Thursday and down $5.01 from last Friday. The Select cutout was $189.96 up $0.14 from Thursday and down $3.28 from last Friday. The Choice Select spread was $10.40 compared to $12.13 a week ago. Wholesale beef prices continue to wane as temperatures rise and as beef production increases. Middle meats are finding little to no traction during the dog days of summer as many consumers have shut down the grill until cooler temperatures persist. End meats on the other hand not only lost traction but are sliding down the slippery slope. Chucks and rounds have been soft through most of 2016 compared to one year ago, and they are finding it difficult to dig a toe hold in today’s market. The one bright spot in the beef industry is 50 percent lean trim which has been trading above year ago levels for several weeks now. Alternatively, 90 percent lean beef cannot seem to break the $220 per hundredweight price barrier compared to prices just shy of $300 through the first seven months of 2015. One factor supporting lower wholesale beef prices is the 4.4 percent year to date increase in federally inspected beef production. Taking a little closer look, beef production since the beginning of June is up nearly 7 percent compared to the same time period last year.

OUTLOOK: There are several words that describe the futures market but difficult may be the nicest. It is extremely difficult to discuss cattle market prices when the futures market appears to be way out of line with fundamentals. It is also difficult to shed any light on why the futures market and thus local cash prices are extremely volatile. August feeder cattle futures traded to a new contract low on Thursday with a close at $134.40. Thursday’s close is nearly $30 lower than where the same contract was trading in March and $50 lower than last September. The dramatic decline in prices has resulted in many stocker and backgrounding operations losing large sums of money. The same price decline has tremendously impacted cow-calf producers who background their calves after weaning. For example, consider a cow-calf producer with a fall calving herd that weans 525 pound steer calves in May and markets cattle in mid to late summer. Based on Tennessee weekly auction market averages, 525 pounds steers were worth $814 per head in May. If the producer were able to market those calves at 650 pounds as valued added cattle in today’s market then they are worth $865 per head which results in a breakeven cost of gain around 40 cents per pound. The ability to put those same animals in a load lot would likely increase their value relative to a smaller lot of value added cattle, but the breakeven cost of gain would still be fairly low. This same situation has been playing out in the stocker cattle business the past several months. Stocker producers have been losing several dollars on the cattle they are currently marketing which is due to the high prices paid for those animals in the spring of the year. Many stocker producers still have some time for the market to turn around on the cattle purchased in May and June. It is hard to imagine feeder cattle prices softening much more this summer which is about the only bright side to the story. Fall stocker purchases look promising if producers can weather the storm the next few months.

The July cattle on feed report for feedlots with a 1000 head or more capacity indicated cattle and calves on feed as of July 1, 2016 totaled 10.36 million head, up 1.2% from a year ago, with the pre-report estimate average expecting an increase of 1.6%. June placements in feedlots totaled 1.53 million head, up 3.0% from a year ago with the pre-report estimate average expecting placements up 6.1%. June marketing’s totaled 1.91 million head up 9.4% from 2015 with the pre-report estimate average up 9.7%. Placements on feed by weight: under 600 pounds down 17.1%, 600 to 799 pounds up 1.5%, and 800 pounds and over up 17.4%.

ASK ANDREW, TN THINK TANK: Where is the bottom, and when is it going to come? This is a great question for the Almighty Creator, but His answer probably has nothing to do with cattle markets. Additionally, if there is someone on this earth that does know the answer to those questions as it relates to cattle markets then there is a high probability that they will not share that information. What light can be shed on these questions? Based on historical cycles, cattle prices are likely to continue declining the next couple of years if there is no shock to the market from outside forces. The market could easily decline another 12 to 18 percent over the next few years which would put a lot of pressure on cow-calf producers. The market has found a way to shift quickly the past few years, but such quick shifts are not likely to persist.