Low Cull Cow Prices and Complex Culling Decisions

Cattle markets overall have shown impressive strength despite larger supplies during 2018. Feeder steer market averages have been near level or slightly stronger than 2017 levels in many markets over the past few months even in the face of larger calf supplies. USDA-AMS reported national feeder and stocker receipts were around 15 percent higher during August-October 2018 as compared to the same three months during 2017. Moving more calves at level or higher prices is a testament to the current demand-driven environment.

But the same “strength despite supplies” story does not hold for the cull cow market in 2018. Usually one of the more predictable seasonal markets, cull cow sellers have been plagued by low and going-lower prices for most of the year. Cull cow price data is a little more difficult to disentangle because there is often not as much volume or consistency across markets as there is for feeder cattle – but the trend has certainly been lower cull prices in 2018.  In Mississippi, average cull cow prices reported were about 16 percent lower over July-October 2018 compared to the same four months of last year. Similar declines are true for the rest of the country, too. South Dakota, average cull cow prices were about 12 percent lower over July-October 2018 compared to the same four months of last year. In San Angelo, TX, cull cow prices were 18 percent lower over this same period and in Kentucky, cull cow prices averaged about 17 percent lower

Larger supplies are indeed a big factor. Beef cow slaughter has been running above year-ago levels for nearly all of 2018. USDA-AMS reports about a 12 percent increase in the number of cull cows and bulls sold since the beginning of July 2018 when compared to the same period last year. Some of this is due to a larger U.S. cow herd leading to there simply being more potential culls. Low margins for dairy producers forcing more dairy cows into the slaughter mix is another factor.

While prices have been low already, we are now in the time of year when we typically expect lower cull prices. Cow slaughter is seasonally higher during the last three months of the year as producers make cull decisions prior to winter. Combined with winter usually being a slower ground beef demand time of the year, there usually is not much cull market strength until we get closer to Spring.

This dynamic makes cull decisions a little more complex this year for many producers. Wintering a cow that you do not plan to keep is generally something producers are not keen to do. But that may not be the case in certain instances this year – especially for producers who have been waiting for a cull price rally to sell over the past few months without reward. Culling, even at current prices, will still make sense for many (probably even most) producers once the cost of carrying a cow through the winter is considered. But for producers with relatively low marginal wintering costs, this is at least a year to crunch the numbers.

 

Strong Summer Meat Demand

Now that summer is fully behind us, we can get a picture of how strong meat demand was during this time. In short, it was a good quarter for the U.S. economy in general and also for beef and other meat demand. Consumer confidence continued to grow during this time and that boosts consumer spending. The following is a mix of my commentary and that of my colleagues at the Livestock Marketing Information Center.

The net value of goods and service produced by the U.S. economy during the summer quarter (July, August, September) increased at a 3.5% annual rate. That followed a solid Spring quarter, which was up 4.2%. Sustained U.S. economic growth rate over the last six months was the strongest since 2014. Consumers played a pivotal role in that growth by upping spending at a 3.8% to 4.0% rate. Consumer spending choices during the last six months reflected a preference for bigger-ticket discretionary purchases such as autos, furniture, and recreational goods. The latter category registered  9.4% and 12.4% quarter-to-quarter gains in the last two quarters. But it was also a good quarter for food and specifically beef purchases.

The spending category labeled “food and beverages purchased for off-premises consumption” (mostly grocery store purchases) was up 2.8% and 4.0% for the Spring and Summer quarters, respectively. Those increases fall into the middle range of growth for this sector during the last two years. Meanwhile, the spending category “food services and accommodations” jumped 8.1% and 6.9% during the Spring and Summer quarters, capturing the preference for away-from-home (restaurants) meals.

Wholesale market measures of beef demand were consistent with trends in consumer spending choices. Beef has more exposure to foodservice marketing channels than pork. The Choice beef cutout this summer was up 3% from a year ago, even as beef supplies from steers and heifers increased by 0.5%. More product sold at a higher price is the essence of favorable demand. Impressive export growth also played a role in this situation. By comparison, pork production was up 1.2% from a year earlier during the Summer, and hog carcass values were down 17% from the previous year. Lack of foodservice efforts to promote bacon was a noticeable difference this year compared to last year. Market conditions for chicken suggest problems. Breast meat values in wholesale marketing channels were down 23% from a year ago during the Summer with production only up 3.5%.

In total, beef demand was strong during the Spring and Summer of 2018 and this helped support prices in spite of larger supplies. Beef demand was bolstered by strong grocery store spending and strong restaurant spending.

2019 Forage Insurance Deadline Approaching

The deadline for a relatively new (for Mississippi) subsidized forage insurance program is November 15th for the 2019 year. Forage production is a primary source of grazing and hay for livestock producers and forage production is highly dependent on rainfall. The uncertainty of rainfall amount and timing is a risk all forage producers face. To address this risk, producers can use strategies such as forage diversification, improved soil fertility, and strategic grazing management. In addition to these strategies, there is a relatively new insurance product that aims to help forage producers manage rainfall risk.

The Pasture, Rangeland, and Forage (PRF) insurance program provides subsidized insurance protection for perennial forages produced for grazing or harvested for hay in the U.S. The program is administered by the United States Department of Agriculture (USDA) Risk Management Agency (RMA). Payments are triggered only by low precipitation during a specified period of time relative to a chosen coverage level. The program is designed to provide producers the ability to offset replacement feed costs when low precipitation causes reduced forage production. While this program has value to livestock producers who depend on forage production, it is important to note that PRF insurance is not directly linked to actual forage yields or livestock performance.

Research has shown that on average, over time, the benefit of this program is likely to outweigh the costs to the producer. A big reason for that is the 51% to 59% subsidy level. PRF has only been available in Mississippi since 2016. And as shown in the figure above, participation was fairly small in 2017. If you have any questions about it, below are some links for more information or feel free to reach out to me at josh.maples@msstate.edu. You can also view a more detailed publication I wrote on this program by clicking here

Links of Interest 
Pasture, Rangeland, and Forage Home Page

Estimated Premium and Historical Performance Tool

USDA-RMA Agent Locator Tool

Meat Prices at the Grocery Store

It is no secret that the price at which retailers can ultimately sell beef and other meats has an enormous impact on the price of cattle. Beef demand is contingent upon quantity sold and the price at which it was sold. The prices of other proteins, namely pork and chicken, have an indirect impact. If pork price gets cheaper compared to beef, then some consumers might buy pork instead of beef which impacts beef demand. Beef prices have been mostly lower in 2017 and 2018 than they were during the lower-supply years of 2014-2016. But, they have not fallen off significantly and the larger supplies of 2018 are still moving at relatively strong beef prices. There are indications that retail beef price fell in September according to Bureau of Labor Statistics survey data that is compiled by USDA’s Economic Research Service (ERS) and the below commentary from the Livestock Marketing Information Center.

The biggest retail price decline from August to September was for Choice Beef, falling 15 cents per pound. Even with the drop in price, compared to twelve months earlier, prices were still 2% higher. ERS also calculated a monthly “All Fresh” retail beef price which declined 4 cents per pound in September but was slightly higher (up by less than 1%) compared to a year earlier.

 

Ground beef prices in September were moving lower, similar to the ERS measure of “All Fresh” beef. The exception was the lean or extra lean grades that were up 2 cents per pound. The declining price trend for fresh beef during September has been the general rule since 2011, with declines of 2-5 cents every year except in 2014. In 2014, cow slaughter was down close to 20% from the prior year, and beef production declined by nearly 5%, resulting in tight supplies of beef grinding material.  During the last three years, the “All Fresh” beef price in grocery stores has continued to decline during the last quarter of the year.  Wholesale price trends for beef trimmings in recent months were moving lower relative to the first half of the year, which should keep retail ground beef prices on the defensive.

That compares with retail pork prices that were 5% lower than a year earlier and chicken prices that were lower by a fraction of a percent. Lower pork price was driven by bacon. Nationally, September bacon prices averaged $5.50 per pound. In September 2017, grocery store bacon prices set a record at $6.36 per pound. Grocery store chicken prices fell 2 cents per pound from August, reaching the lowest level since January. On a quarterly basis, that average price fell below $1.90 in the last quarter of 2016 and has not returned to that level since.

Cattle on Feed Mostly Bullish

The latest USDA Cattle on Feed Report was released on Friday and showed some positive news for prices for the rest of Fall and into early 2019. The inventory is still large. Indeed it is another “record-large” total as 11.4 million head in feedlots is the largest October 1st total since the COF series began in 1996. However, it is what was contained in this report relative to pre-report expectations that provided some price support as futures prices showed strength in Monday trading.

Placements of cattle into feedlots were 2.05 million head during September. Importantly, this is 4.6% lower than September 2017. Perhaps even more importantly, this is about 5% lower than was expected pre-report. A lower placement and supply number than expected is what led to some market strength on Monday.

Relative to 2017, the number of heifers in the mix is 11% larger at 4.3 million head. The number of steers is up a more modest 2.3% at 7.1 million head. The story over the past few months has been of lower placement weights and that was again the case in September. This is an interesting dynamic that ultimately has an impact on lower average slaughter weights.

Fed Cattle Marketings were 3.6% lower than September of 2017. While this number is lower, it was well anticipated going into the report.

The combination of the anticipated marketing rate and the lower than expected placement rate led the inventory in feedlots number to be lower than expected. However, it is still a big number which is likely to keep a cap on market price potential in the near-term. It is encouraging to prices that it seems like there may be fewer supplies than expected, but the calf crop is still larger than a year ago and we still have to work through these large supplies. The combination of a large number of heifers in the mix and continued high cow-slaughter numbers do provide credence to the projection of a flattening total herd number over the next year or two.

Beef Exports Strong … Again

Recent trade data released by USDA-ERS shows that U.S. beef exports have continued their record pace through the month of August. August exports were up 9% over August 2017 and the January-August total is 14.17% above the same period of 2018.  According to data released by USDA and compiled by the U.S. Meat Export Federation (USMEF), beef exports topped $750 million in August – another “first-ever.” This was an 11% increase in value over August 2017 according to USMEF.

While Japan remains the number one destination for U.S. beef exports, exports to South Korea are rapidly increasing. Beef and veal exports to South Korea totaled 66.59 million pounds in August which was 45.43% larger than August 2017. The January-August totals show a 47.92% increase in U.S. beef exports to South Korea as compared to the same period of 2017. Together, Japan (31.39). and South Korea (23.17%) accounted for 54.57% of U.S. beef exports during the month of August. Mexico (14.7%), Canada (8%), Hong Kong (5.5%), and Taiwan (6.9%) combined for an additional 35.11%. The remaining 10% (or 29.7 million pounds) was scattered among an additional 88 countries.

Imports in August were very close to August 2017 levels. Canada (26.5%), Austrailia (24.6%), Mexico (16.6%), New Zealand (15.8%), Nicaragua (6%), Brazil (5%), and Uruguay (4.2%) combined for 99% of total imports in August.

Winter Grazing Prospects

The condition of winter grazing pasture in Texas, Oklahoma, Kansas, and surrounding areas has a significant impact on market prices in the Southeast. It is directly tied to demand for calves because good pasture can support more calves while poor pasture conditions lead to fewer calves needed and lower demand. Below is analysis and commentary from Dr. Derrell Peel at Oklahoma State University discussing the impact of the current prospects of good winter pasture on current calf prices. I think it is spot-on and is a big driver of our relatively strong market prices right now. 

Winter wheat pasture continues to develop rapidly in Oklahoma.  Some pasture will be ready for grazing in the next few weeks.  As a result strong stocker cattle demand is evident.  Despite a 32 percent year over year increase in combined auction volume this past week, average Oklahoma auction prices for preferred stocker weights jumped sharply last week.  Prices for 450-500 pound, Medium/Large, number 1 steers increased $6.64/cwt. from the week before to $183.23/cwt. and prices for 500-550 pound steers were up $4.89/cwt. to 171.77/cwt.  Prices for steers under 450 pounds were mostly higher as well, compared to the previous week.  These counter-seasonal price increases sometimes happen when winter stocker demand kicks in before the fall run of calves thereby offsetting, at least in the early fall, the supply pressure that typically pushes prices to a seasonal low in October.  Oklahoma feeder prices at the end of September were generally 4 to 10 percent higher than the same time last year.

Prices for feeder steers over 650 pounds were also higher compared to the previous week.  However, prices for steers between 550 and 650 pounds declined compared to the previous week.  As a result, weekly average prices are nearly equal for steers weighing from 550 to 750 pounds: 550-600 pounds, $163.67/cwt.; 600-650 pounds, $162.80/cwt.; 650-700 pounds, $162.62/cwt.; and 700-750 pounds, $163.01/cwt.  This price pattern contrasts with the more typical pattern of higher prices for lighter weight animals.  However, this unusual feeder price pattern occurs quite commonly in Oklahoma in the fall when stocker demand supports lightweight feeder prices and feedlot demand supports heavy feeder prices leaving a hole with weak demand for the middle weight feeder animals.  In general, six-weight steers at this time of the year are too heavy to be preferred for stockers and too light for feedlots, who favor heavier placement weights to maximize the number of fed cattle that will finish against the April Live Cattle futures contract and avoid the sharp break between the April and June Live Cattle contracts.

Numerous factors will affect the likelihood of a seasonal stocker calf price low in the next month.  Supplies will grow as feeder volumes increase to a seasonal peak by early to mid-November. With the larger 2018 calf crop, the fall run of calves is expected to exceed last year.  However, demand for wheat pasture stockers may partially or totally offset increased stocker calf supplies.  I really don’t expect much more increase in stocker prices but additional increases are possible in the next couple of weeks.  As we move through October into November, feeder prices are likely to stabilize or perhaps move lower but the seasonal low may be quite muted. Recent purchase price increases have reduced the return potential for winter stockers meaning that producers should carefully budget winter stockers to guide upcoming purchases.  For cow-calf producers, recent calf price increases have added upwards of $50/head to calf value in the past six weeks or so.

Larger, Lighter Placements

The latest Cattle on Feed Report was released on Friday, September 21 after the markets closed. The Monday reaction today was lower live cattle and feeder cattle futures contract prices. Large supplies continue to be the trend as we saw (yet another) largest-on-record total feedlot inventory. Inventory on September 1st was estimated at 11.125 million head which is the largest for any September 1st since at least 1996 when the data collection began. This was 5.9 percent larger than September 1, 2017.

Placements were again the big story. More specifically, placements of lighter-weight cattle were the big story. Placements of cattle into feedlots during August were 7.4 percent larger than during August of 2017. That was above the pre-report estimate of about 5 percent larger than a year ago. This estimate compared to the expectation is likely a big factor in the lower futures prices on Monday as it indicates larger supplies than previously expected.

The weight breakdowns are where the real information is for this report. Placements of cattle weighing less than 600 pounds were up 19.4 percent while the 600-700 pound category was up 17.5 percent compared to last year.  Since May, placements of cattle under 700 pounds is up approximately 13 percent while the over 700 pounds category is down 1.0 percent compared to the same period of 2017.  While difficult to point to directly, increased numbers of heifers in the placements mix is likely a driver in these lower placement weights. Heifer slaughter has been about 8 percent larger so far in 2018 compared to the same period of 2017.

Fed cattle marketings were approximately the same as August 2017 and were in-line with pre-report expectations. Steer slaughter is lower than a year ago, but larger beef production is coming from increased heifer and cull cow slaughter. Cow slaughter is up over 11 percent from last year. It is interesting that cow and heifer slaughter is up while steer slaughter is down – though that likely won’t be the case by the year’s end.

Overall, this report continued to tell the story of larger supplies working through the system. Seasonally, placements start to increase in August as more calves are sold and yearlings come off summer pasture. There are still plenty of cattle to place during the rest of 2018.

 

 

 

 

Sell the Rally?

Feeder Cattle futures contracts rallied last week as shown in the figure above. Prices for the October Feeder Cattle contract rose approximately $5 between the Tuesday close and the Friday close. The story was similar for other contract months, too, including the March contract.

The rally can be attributed to “good news” from multiple sources. Strong packer demand pushed live cattle prices higher and led feeder cattle futures higher, too. There were also developments in the feeder cattle markets that are providing support for feeder prices. The timing of this particular rally is intriguing for multiple reasons. The rally goes against normal seasonal trends. Typically, feeder prices weaken this time of year due to larger supplies of calves being sold.

The USDA released the World Agricultural Supply and Demand Estimates (WASDE) on Wednesday. The WASDE estimated an even larger supply of corn than expected which could suggest continued lower prices of the primary feed ingredient. Corn futures prices reacted as expected and were 4 to 5 percent lower at week’s end. We have previously discussed the inverse relationship between corn price and feeder cattle prices (available here).

Winter wheat planting prospects are also very good. To be fair, it is very early with planting just now underway. However, moisture conditions in most of the major wheat planting areas are in great shape which is spurring stocker demand for winter calves based on grazing potential.

This is also a week between two significant reports. The next Cattle on Feed report will be released on September 21. On the heels of the “abundant corn” WASDE estimates, this COF has implications for stocker buyers and feeder cattle futures prices. The current price of the March 2019 futures contract is favorable for many stockers wishing to lock-in a price above break-even levels using typical spring basis estimates. A COF report showing larger-than-expected placements could weaken these Spring futures prices.

So where does that leave producers trying to decide whether this is the week to buy or sell? Was last week the start of a multi-week rally? Or did markets overreact and the gains will be quickly erased? There is no way to know for sure, but the stronger futures prices are likely to spark cash market buyer interest this week – especially for those buyers who manage price risk. For producers with calves to sell, stronger buyer interest is a good development. That good development should have many considering now as a possible time to sell.

Beef Exports Surge Continues

USDA’s Economic Research Service and Foreign Agricultural Service released the most recent monthly trade data last week. The big story is continued large beef exports. For the month of July, exports were up 16.8 percent over July 2017. For January-July, beef exports were 15 percent higher than the same period a year ago.

U.S. beef exports to Japan and South Korea continue to lead the way in terms of volume. Beef and veal exports to Japan totaled 84.3 million pounds in July which was 12.9 percent larger than July 2017. Japan continues to be the largest export market for U.S. beef but South Korea is where the most rapid growth is occurring. Exports to South Korea during July were up 61.1 percent over July 2017 and year-to-date exports are up 45 percent. Japan and South Korea have combined for nearly half of the total beef exports so far in 2018. Add in Hong Kong, Taiwan, and Vietnam and the share of U.S. beef exports that go to Asian countries is about 65 percent. Mexico and Canada are the third and fourth largest export destinations and have combined for 24 percent of 2018 U.S. beef exports.

Imports were down slightly from a year ago and are very near 2017 year-to-date levels. Canada, New Zealand, Austrailia, and Mexico are the four largest and combine for 86 percent of total imports. Austrailia continues to deal with drought impacts which have reduced the amount of beef imported.