Dr. Kenny Burdine, Livestock Marketing Specialist, University of Kentucky
The feeder cattle market did give back some of its fall gains in the last couple weeks as fed cattle prices pulled back from their highs. At the time of this writing (November 15, 2017), spring CME© live cattle futures have dropped roughly $5 per cwt from their early November highs and feeders have followed suit. While my charts below only show monthly prices through October, the first couple weeks in November did suggest slightly lower prices. This is not unusual for November, but I do not view this as a typical “seasonal” price drop. In this case I think it is directly in response to lower fed cattle prices, which had really been on a tear since August. There is still very little indication that we have seen major calf runs and given weather conditions and lower feed prices, we may not see our typical fall runs at all.
One dynamic that producers have commented on is the lack of market separation between calves and heavy feeders. Even a quick glance at the charts below shows very little price difference per cwt in 550 lb steer calves and 850 lb feeder steers. Some of this is due to overall market price levels and some it is also due to cheaper feed prices this fall, but the primary reason is a simple matter of timing.
Feeder cattle values are ultimately driven by their eventual value as fed cattle and the cost of finishing them. The timing issue in the fall primarily comes down to when those feeder cattle would be finished. As of mid-November, there was nearly an $8 per cwt decrease in CME© live cattle futures from April to June and roughly an $11 per cwt decrease from April to August. Those heavy feeder cattle, that can be finished sooner and hit that higher spring fed cattle market, are clearly going to have much greater value when sold as fed cattle. Feedyards know this and as they bid against each other to place those heavy feeders, they bid their prices upward in response. Conversely, those lighter calves would be on feed a longer period of time and would be sold on the lower summer fed cattle market. This is actually a pretty common market dynamic in the fall, but it just seems more pronounced this year than usual.
Given the expected decrease in fed cattle prices from spring to summer, it is very unlikely that current prices for heavy feeders can be sustained without some outside factor emerging. However, there are some additional factors that are likely to impact calf markets in the next couple months. First, local feed prices are such that the cost of growing calves this winter is lower than it has been for a while. This makes these calves pretty attractive to winter backgrounders. Couple this with the fact that we are not seeing a lot of calves move through markets due to exceptional fall weather, and we should continue to see support for calf prices.
Secondly, we are now approaching the time when wheat grazing becomes relevant. Grazeout programs often set a foundation under our fall / winter calf markets and they are likely to do so again this year. I was on a conference call with some colleagues earlier this week and several in the southern plains were discussing this. The general consensus was that wheat was planted and was up, but that placements had not been large thus far. However, they indicated that they thought overall interest in grazeout was strong and they expected a lot of placement in the near future. As these winter grazers start looking to place calves into winter programs, they will be competing with winter backgrounders and feedyards for these calves.
Figure 1. 550# Medium & Large frame #1-2 Steers
KY Auction Prices ($ per cwt)
Source: USDA-AMS, Livestock Marketing Information Center, Author Calculations
Figure 2. 850# Medium & Large Frame #1-2 Steers
Kentucky Auction Prices ($ per cwt)
Source: USDA-AMS, Livestock Marketing Information Center, Author Calculations