Weekly Livestock Comments for November 30, 2018

– Dr. Andrew Griffith, Assistant Professor, Department of Agricultural and Resource Economics, University of Tennessee

FED CATTLE: Fed cattle trade was not well established at press as bid and ask prices were separated by as much as $8 on live basis. Prices are likely to settle near un-changed compared to last week.

The 5-area weighted average prices thru Thursday were $115.46 live, up $0.09 from last week and $183.08 dressed, up $1.59 from a week ago. A year ago prices were $120.68 live and $190.05 dressed.

Cattle feeders and packers were slow to agree on a price this week with cattle feeders asking $4 to $5 higher prices than the previous week while packers were bidding $3 lower than the prior week. It is highly unlikely the market will move much in either’s favor compared to week ago prices given the somewhat stagnant nature of live cattle futures following the Thanksgiving holiday. Cattle feeders should still hold some leverage over packers at this point in the game as the holiday season buying and restocking of beef counters post-holiday will keep the beef market supported. Cattle feeder leverage may be further sustained during the winter months if poor winter feeding conditions result in lighter weights.

BEEF CUTOUT: At midday Friday, the Choice cutout was $212.79 up $0.18 from Thursday and down $0.44 from last Friday. The Select cutout was $198.64 up $0.11 from Thursday and down $0.29 from last Friday. The Choice Select spread was $14.15 compared to $14.98 a week ago.

Quality and yield grade is where value is made or lost. In the year 2000, the percent of carcasses grading Prime, Choice and Select were approximately 3.5, 57.3, and 39.2 percent respectively. These values were consistent in 2005. In 2010, the percentage of cattle grading Prime was consistent with previous years but the percentage grading Choice was about 64.5 while Select was at 31.5 percent. By 2015, the percentage of cattle grading Prime was near 5.4 percent with Choice cattle making up 72.9 percent. In 2018, the percentage of cattle grading Prime through the end of September was 7.8 percent while 73.7 percent graded Choice and only 18.3 percent graded Select showing tremendous improvement in quality grade. However, the opposite is happening with yield grade. The percentage of yield grade 1 carcasses in 2000 was 10.9 percent with 45.7 percent yield grade 2 carcasses, and 41.0 percent yield grade 3 carcasses. In 2018, yield grade 1, 2, 3, 4, and 5 were 5.9, 35.3, 47.1, 10.0, and 1.7 percent respectively. Does the market no longer place enough value on yield or is quality all that matters?

OUTLOOK: There are several reasons cattle producers do not use the futures market as a risk management tool and there are several reasons why some producers do not even look at the futures market. This week’s price action from a cash standpoint increased compared to last week while the price action of feeder cattle futures moved lower through the week. This move in opposite directions represents a reason why producers do not use it for risk management and do not even look at it for expected price movement. However, this is a flawed depiction of the two markets. Feed-er cattle futures prices surged higher late last week and were a couple of dollars to several dollars higher than any daily trade from the week prior. Though there was softening in the market this week, the futures market continued to trade above prices from two weeks ago. The Thanksgiving holiday shutdown several auction markets while the futures market kept chugging along which impacted trends on the cash market. Additionally, the futures market is the expectation of what is going to happen in the future while the cash market is a here and now type of market. This would indicate that the futures market is for long-er term planning horizons instead of near term solutions. Considering feeder cattle futures and looking longer term, the yearling cattle market moving through the winter and spring months appear to be stagnant in 2019 with the market gathering strength in the summer and fall months. The current price expectations should support calf prices from now through early April with the strongest calf prices in late February through early April. For producers with spring born calves yet to be marketed, holding onto the calves until the first of the year should be a profitable decision as grass cattle will be in demand. The suggestion to yearling cattle producers is to stay the course at this point. There does not appear to be any advantage to hedging cattle now with little indication of market prices moving lower and value of gain numbers being favorable.