Weekly Livestock Comments for August 11, 2017

– Andrew P. Griffith, University of Tennessee

FED CATTLE: Fed cattle traded $2 lower compared to last week on a live basis. Prices on a live basis were primarily $114 to $116 while prices on a dressed basis were mainly $183 to $185.

The 5-area weighted average prices thru Thursday were $115.17 live, down $2.13 from last week and $183.89 dressed, down $3.46 from a week ago. A year ago prices were $116.91 live and $186.86 dressed.

Seasonal summer softness edged its way back into the finished cattle market as packers were able to drive prices a little lower this week. The live cattle market will remain under pressure through the summer. However, it is difficult to predict the bottom as live cattle futures remain at a huge discount compared to the cash market. The August live cattle contract lost more than $6 from last Friday while the cash market only traded $2 lower. The price movements this week widened the basis further while deferred contracts are calling for lower prices. A strong positive basis and lower prices on the deferred con-tracts will continue to pull cattle out of the feedlot at a rapid pace unless cattle feeders revert back to marketing tactics practiced in the fall of 2015.

BEEF CUTOUT: At midday Friday, the Choice cutout was $199.77 down $0.86 from Thursday and down $4.34 from last Friday. The Select cutout was $196.35 up $0.16 from Thursday and down $1.86 from last Friday. The Choice Select spread was $3.42 compared to $5.90 a week ago.

Given the midday Choice cutout price, it appears the Choice cutout price will fall below the $200 threshold for the first time since February 24th. Beef prices had a strong run through the spring and early summer with prices peaking over $252 in the middle of June, but the dog days of summer are taking their toll. Last year it was August 26th before the Choice cutout dropped below $200, but today’s price is only $1.81 lower than it was the same day one year ago. The concern comes in when considering the Choice cutout dropped be-low $180 during the back half of October 2016. Could that be in store for the fall of 2017? Beef prices could continue to spiral downward over the next couple of months before holiday purchasing begins. Such a downward movement would put pressure on finished cattle prices as well as feeder cattle prices. If beef production remains elevated and exports falter the next few months then downside risk will remain and prices could fall below year ago levels later in the year. Participants in the cattle markets should keep an eye on this situation.

OUTLOOK: Feeder cattle futures were pummeled most of the week as prices dropped faster than a lead weight in a water trough. Most of the decline in feeder cattle was likely in response to live cattle futures being in a free fall. It is difficult to say with certainty why the market took such a hit this week other than everyone in the marketplace knew there was still time for finished cattle prices to soften which did occur this week. However, Friday trade showed some glimmers of hope as live cattle and feeder cattle traded to the up-side at one point. Some of the upside in Friday’s feeder cattle futures trade was likely a result of the USDAs release of the August Crop Production report. Even though August corn production projections were lowered from the July report, USDA estimates U.S. corn production to exceed projections by other industry experts. This subsequently resulted in corn prices softening. Similarly, soybean prices took a hit due to expectations of increased production. This information does not bode well for grain farmers at this time, but it does present opportunities for the livestock industries. Cattle feeders rely heavily on grains, oilseeds, and by products of these crops. The recent price decline may be offering an opportunity to price feed at a relatively low price which should result in a fairly low cost of gain. With a lower cost of gain on the table, there remains an opportunity to add weight to calves. The lower cost of gain in feedlots could result in cattle feeders being more aggressive while purchasing cattle, but the likelihood of this is small given they have been aggressive throughout 2017. Feedlot placements for the first six months of the year are up 10.2 percent compared to a year earlier. Seasonally speaking, placements will begin to escalate with October placements potentially being 40 to 45 percent higher than June placements. Most of the fall increase will come from spring born calves weighing less than 700 pounds. This does not mean there is more competition for these animals. It simply means there are more of these animals out there than producers want to background which also means there is an opportunity.