USDA Acreage Report Pushes Corn Prices Lower

As the cattle market continues to watch what is going on in corn markets, a major report was released on Friday. The annual USDA acreage report was released on Friday and showed a significantly smaller decrease in the number of corn acres in the U.S. than many were expecting it to show. This led to a wild day of trading in corn futures on Friday and left corn futures prices sharply lower by the closing bell.

The report estimated 91.7 million acres of corn planted in the U.S. This was lower than the March Planting Intentions estimate of 92.8 million acres but significantly higher than the average pre-report expectation of about 87 million acres by various trade groups. A higher acreage estimate translates to a higher production total – although yield concerns are another big piece of the puzzle.

As a reaction, corn futures dropped the full 25 cent limit at one point on Friday for the September contract before closing 21 cents lower than the day prior. There was a 40 cent range between the daily high and low. August feeder cattle futures nearly touched $140 for the first time since June 11th before closing just below $137 per cwt.

A lot of money was made and lost on Friday by speculators – and there is already plenty of “I don’t believe those estimates” being tossed around. Many headlines are suggesting that the report is not accurate, there wasn’t enough information, or even that the report should not have been released at all this year. The mad finger should not be pointed at USDA-NASS. They followed the same process as they do every year and everyone knew the report would reflect information collected a few weeks ago.

The report is based on farmer surveys that asked about June 1st planting intentions. Usually, farmers’ intentions on June 1st are very close to what they will actually plant for the year. The historically slow delays in 2019 mean that at least some farmers were unable to execute their June 1st intentions. Because USDA knows this is an unusual year, the report also included an announcement that USDA will resurvey 14 states about planting acreage and release those results on August 12.

What occurred in the futures market on Friday was telling about the level of uncertainty in this market. While many will say that the actual planted acreage will be lower than the estimates released on Friday (and it likely will be), the reality is that the group of people voicing their opinion as a whole using their real money (traders), believed the value of corn in the future would be lower after this report than before. So the report was clearly not ignored. The focus now shifts to yield as the growing season progresses. Lower yields can lead to the same impact as lower acreage totals.

Cattle on Feed and Live Cattle Price

The latest Cattle on Feed report showed 11.7 million head of cattle in feedlots with capacity of 1,000 or more head. This was a 1.6 percent increase over last year and the largest June 1st total on record going back to at least 1996 when the series began.

Placements were down about 3 percent compared to a year ago. This decline was fueled by stronger placements in March and April of this year as well as an especially large May 2018 placements number to which the 3 percent decline is comparing. Marketings were up about 1 percent over year-ago levels. All of these estimates were pretty well-anticipated pre-report.

While there are record numbers of cattle on feed, feedlots are still current. There does not seem to be a large number of ready-to-market cattle sitting in feedlots waiting for better market conditions. The primary indicator of this is the falling steer dressed weights. The latest weekly data show steer dress weights five pounds lower than a year ago and about 10 pounds below the 5-year average for the week. This is an indicator of that marketings are current because if there was a large backlog of market-ready cattle, we would expect steer dressed weights to increase. There are indications that these lower weights will not last. The higher corn prices combined with exceptional grazing conditions are leading to economic incentives to add as much weight as possible prior to the feedlot stage of production. Heavier placements generally lead to heavier fed cattle.

A look at live cattle prices shows a continuing weakening of prices. The 5-market live cattle price dropped to $110.48 per cwt for the weekly average last week which is the lowest since October 2018. Perhaps surprisingly, this is still higher than year-ago levels when live cattle dropped to their 2019 lows of around $107 per cwt. The August Fed Futures contract closed at $102.50 today which is near the contract low from last week. Trading has continued to force futures lower which is putting pressure on cash prices to follow. Weaker beef demand than is usually expected during the summer is hurting prices due at least partially to cooler and wetter weather. The boxed beef cutout value is about one percent lower than a year ago with particular weakness is the higher-value cuts of the rib (-4.4%) and loin (-8.8%) primals through the first 3 weeks of June.

Where do live cattle prices go from here? It is hard to say anything with much confidence right now without a better estimate of what corn prices will do. Barring worse news from the corn market, below $100 per cwt just doesn’t seem likely for a very long period of time though the August futures are trading near it now. But 3rd quarter live prices will face pressure with larger supplies and higher feeding costs and are likely to average lower than $111 per cwt seen in the 3rd quarter of 2018.

Cattle Producers Watching the Corn Markets

 

It was only 2 months ago that I wrote the following headline in this newsletter: Large Estimates Push Corn Prices Lower. Included in that article was the story was that many farmers were planning to swap form soybeans to corn due to soybean price concerns and that the estimate that there should be plenty of corn this year is positive for feedlot demand.

Things can change in a hurry.

The happenings in the corn market remain a big story for livestock producers as historically slow plantings in the Midwest have led to concerns of lower 2019 production. This has pushed corn futures prices up and put pressure on cattle markets. The wet winter followed by a wet Spring, especially in the Midwest where most of the corn and soybeans are produced has led to slow and late plantings for a significant portion of the crops.

USDA last week released their latest supply and demand estimates. In this monthly report, the forecast for corn was a 1.4 billion bushels lower 2019 production total than was projected just a month ago. This pushes the 2019 corn production forecast down to 13.7 billion bushels which, if realized, would be the lowest since 2015.

The latest Crop Progress Report released today shows that corn is 92 percent planted and 79 percent emerged. The 5-year averages for those stats are 100 percent planted and 97 percent emerged. Even more telling is that a week ago only 83 percent was planted.

While the planting totals are catching up, at this point it is more about the timing of planting rather than percentage. The ideal planting window for corn ended weeks ago. As farmers start to plant corn after the first week of June, it’s riskier because there is less summer available for that corn to grow. It also leads to the worries of an early frost or severe weather of any sort in the summer being potentially more damaging than usual since the crop was late getting planted.

The cattle sector is directly impacted by what occurs in the corn market. Less corn leads to higher feed costs. For the cow/calf producer or stocker or backgrounder, this means that not only are feed prices likely pushed higher, but also the price of the calf is likely pushed lower.

Many cattle producers are likely considering booking corn or feed for the future in fear that prices may rise. This strategy can be a good risk management strategy but the mechanism for booking needs to be considered. If a futures contract or a forward purchase priced based on a futures contract price is used, that price already reflects the current level of uncertainty about 2019 production. The reason for using this strategy would be the belief that traders are currently underestimating the future impact of the planting delays and that prices will be even higher in the future.

Another strategy would be to buy now and store corn or feed. The reason for using this strategy would be the belief that corn prices (plus storage costs) are lower now than they will be in the future when the 2019 crop is realized.

Or there is the strategy to not try to book anything in the future just yet. The reason for this strategy would be the belief that corn prices have run up too far over the past few weeks and that the production impacts won’t be as bad as traders believe.

There is no clear correct answer right now. Corn is in a weather market and that is nearly impossible to predict. If the weather cooperates and there are great growing and harvesting conditions the rest of the season, USDA could be revising that corn production back up again in a few months.

Chinese Tariffs Impact on Cattle Markets

The trade war with China is now in its 16th month with little evidence of an end in the near future. It appeared that an agreement was imminent at one point but no deal was struck in that round. Agriculture has faced some of the most significant impacts from retaliatory tariffs placed on U.S. commodities shipped to China. Just last week, USDA announced a second round of support for specific farmers impacted by the tariffs. This list does not include beef cattle.

Meanwhile, the cattle markets have been in a pretty sharp decline downward over the past 6 weeks. The August feeder cattle futures prices are down about $17 per cwt since mid-March and down $27 per cwt from the contract high on April 18th. Similar declines have occurred in cash markets. Southeastern states’ auction averages have dropped approximately 10 percent in the past five weeks.

So a natural question is, are the two related? Are Chinese retaliatory tariffs causing cattle prices to decline? To answer this, we are going to look at the direct impacts of Chinese tariffs, the impact on inputs like corn, the impact on competing meats like pork, and the impact of overall market uncertainty.

The direct impacts are fairly straightforward. As part of the overall trade retaliation, China placed additional tariffs on U.S. beef. Because tariffs act similarly to taxes, this means U.S. beef became more expensive in China. After the latest round of increases, the tariffs on U.S. beef range from 37 to 50 percent. Those tariffs have a negative impact on U.S. beef exports to China. However, we really don’t export much beef to China. We have only had access to Mainland China since June 2017. Since that time, our exports to China have averaged about one percent of our total monthly exports.  An argument could be made that the additional tariffs are hindering the expansion of exports to China, but the direct impact of the retaliatory tariffs on cattle prices is likely small.

Next is the impact of the tariffs on inputs such as corn and soybeans. Soybeans, in particular, have been hit hard by the Chinese tariffs. The U.S. was exporting approximately one-third of our soybean production to China pre-tariffs. China needs soybeans. They produce and consume a lot of pork and need to feed those hogs. U.S. Soybean markets fell sharply last summer and remain depressed. Corn is not nearly as reliant on Chinese exports as soybeans and faces a smaller direct impact. The indirect impact on cattle is that Chinese tariffs on soybeans and corn lowered demand and therefore the price for those products. Lower input prices are generally positive for cattle prices. Corn prices have spiked recently which is very likely one cause of cattle market weakness. But this spike is due to weather and historically slow planting in the Midwest. Here is a good summary from American Farm Bureau.

The impact is similar for competing meats, specifically pork. Generally speaking, lower pork prices suggest some consumers might choose pork instead of beef if beef prices stay the same. The Chinese tariffs on pork indeed led to lower U.S. hog prices in the summer of 2018. But the bigger story recently is the spread of African Swine Fever (ASF) in China which is decimating the hog population. This has caused hog markets to spike significantly due to fears of lower supplies. Altogether, the indirect impact on cattle prices due to Chinese tariffs on pork is likely small, especially in recent months.

The final point to consider is the impact the trade war has had on general market uncertainty. This is not specific to cattle markets but rather the U.S. economy as a whole. More tariffs and more time before a deal is struck lead to investors being less confident in U.S. markets and can lead to increased volatility. The short-term impact of increased uncertainty on cattle markets is difficult to separate from other market forces with any confidence, but it is likely negative for prices. But it is probably not so negative that it should be considered the primary reason for the recent cattle market decline.

In total, the impact of the trade war with China on cattle markets is mixed but likely small compared to other factors. On the trade front, much more important are the continued trade negotiations with Canada and Mexico because those are major markets for U.S. beef. The announcement on Friday that the U.S. will place a 5% tariff on goods from Mexico was a shock to markets due to fears that Mexico might retaliate with tariffs on U.S. products such as beef.

Concerning the recent drop in cattle prices, there are a lot of factors at play. Seasonality, a bearish April Cattle on Feed report, continued large supplies, weaker export totals, and the recent corn market rally has left cattle markets without much good news in recent weeks. Have the futures markets overreacted? Possibly. Markets rarely make soft landings.

Increased U.S. Beef Access to Japan

The big news in beef markets last week was the increased access of U.S. beef in Japan. The agreement allows U.S. beef from all age cattle to enter Japan which removes a previous 30-month age limit. Below is an excerpt from the USDA announcement.

 

“The U.S. Department of Agriculture estimates that this expanded access could increase U.S. beef and beef product exports to Japan by up to $200 million annually. The agreement is also an important step in normalizing trade with Japan, as Japan further aligns its import requirements with international standards for bovine spongiform encephalopathy (BSE).” (Read the full announcement here).

This is an important removal of a non-tariff barrier. Japan is a $2 billion market for U.S. beef and an additional $200 million annually is a sizable leap. However, there are still tariff barriers in place as U.S. beef faces a steeper tariff than competing countries exporting beef to Japan. The headlines of “Full access” are a bit misleading. It is true that we can export beef from any age cattle, but that beef is still subject to a tariff. For more background on U.S. beef tariffs in Japan, HERE is a link to an article from this newsletter series in 2018.

Timing Bred Cow & Heifer Sales

The graph above is from a recent study and publication led by Tori Marshall, a graduate student in the Department of Agricultural Economics at MSU. Her research used data collected from cattle auctions in Mississippi during 2014-2015 to estimate the impact that pregnancy status has on value.

One of the interesting findings of the study is that pregnant cows or heifers sold at a discount, on average, to open females until they crossed the 5 months pregnant threshold. Females with a calf at side averaged higher than either open or bred females. Retention costs were also considered in a separate graph in the publication to account for the additional costs a producer would incur by holding the cattle longer. The research showed a clear value in knowing whether the cow or heifer is pregnant before selling. Below is a segment from the conclusions

“Mississippi State University research results suggest that waiting to learn the pregnancy status of replacement-quality females at the auction is a pure gamble and reduces expected profit. Producers who opt to pregnancy-check on the farm are better situated to take advantage of improved profits by selecting the best time to sell. Optimal sale timing depends on the producer’s retention costs and the timing of pregnancy check. A producer with relatively low retention costs can optimize profits by selling a cow-calf pair, regardless of when pregnancy is confirmed. However, if retention costs are relatively high, the producer should consider pregnancy checking and selling early in gestation unless the female is later into gestation. If this is the case, just as when retention costs are relatively low, the producer is better off waiting to sell a cow-calf pair. Pregnancy-checking early in gestation also allows the producer to sell immediately if the female is found to be open and, therefore, avoid additional retention costs.”

The sales data were collected in 2014-2015 when cattle prices overall were very high. We expect that the results would be similar today, but at lower price levels.

To view the full (4-page) publication, Click Here.

This post was co-authored by Tori Marshall, M.S. student in Agricultural Economics.

State Level Beef Cattle Inventory

 

 

The January 1 USDA Cattle report released two weeks ago is the most comprehensive inventory report for state-by-state inventories. It provides the best snapshot of the beef cattle industry over time. In this article, we are going to dig in on some of the Southeastern states and look at recent trends We’ll also discuss methodology. The first map above shows the number of beef cows on January 1 by state and the second map shows the change in beef cows since last year.

I think it is important to first briefly mention the methodology USDA uses to collect and estimate these numbers. The inventory numbers are based on survey responses. These surveys include mail, online, and face-to-face surveys, but the primary mode is by phone. For the 2019 report, about 36,000 U.S. producers were surveyed. Since not all producers are surveyed, there is sampling error to consider (this is similar to political polls) and the goal is to minimize the error. Overall, the estimates are not perfect, but they are very good and by far the best publically available.

Looking at the first map, it is no surprise that most of the cows in the U.S. are in the middle of the country. Texas is the largest at 4.7 million head which more than doubles 2nd place Oklahoma for the number of beef cows that have calved. Most of the Southeastern states fall into the lighter shade of green category with between 459,000 and 935,000 head of beef cows.

The second map shows that the Southeastern states were split between small expansion and small contraction for the number of beef cows. Florida was the biggest gainer while Mississippi showed the biggest decrease. The map also shows that in general, the bigger states got bigger while it was a mixed bag for the other states. Missouri, Montana, and Kentucky were the only states in the top 10 to have lower beef cow inventories when compared to last year.

Mississippi ranks 26th for the number of beef cows that have calved at 477,000. This was down 24,000 head from a year ago and had the largest percentage year-over-year decrease of any state with more than 15,000 beef cows. That sounds bad until you consider that the 2018 report showed Mississippi had one of the largest percentage increases when compared to 2017. I suspect the previously mentioned sampling error comes into play here because I don’t see much evidence for a 5 percent growth during 2017 followed by a 5 percent contraction in 2018. Over the past 12 years, the lowest Mississippi beef cow inventory year (468,000 in 2015) and the highest inventory year (503,000 in 2010) were only 35,000 head apart. Looking at the longer trend, steady is the term to use for Mississippi beef cow numbers.

Slowdown in U.S. Cattle Inventory Growth

The USDA Cattle report was released last week and it showed an estimated 0.5 percent growth in all cattle and calves for a total of 94.8 million head in the U.S. on January 1, 2019. The U.S. calf crop estimate of 36.4 million head showed 644,500 (1.8%) more calves were born in 2018 than in 2017 which marked the fourth consecutive year of calf crop increases. This report was mostly the expected mix of slight growth and hints of lower growth in the future. A larger calf crop in 2018 implies beef production will again be higher in 2019 and likely into 2020 but the cow and heifer numbers point toward smaller increases in calf crops in the future.

The inventory of beef cows was 31.8 million head which was up about one percent. However, the number of beef replacement heifers was down 3 percent from January 1, 2018 at 5.9 million head. This left beef replacement heifers at 18.7 percent of the total beef cow herd which is the lowest level since 2013, but still above herd contraction levels. Only 4 of the top 25 states showed year-over-year increases in the number of heifers for beef replacement. It is likely that we are near the end of the herd growth phase of the cattle cycle though it is worth noting there is not yet clear evidence of entering a contraction phase as calf prices remain at profitable levels. A shift higher in prices could push more expansion while lower prices in 2019 could lead to contraction.

A look at the state-level estimates shows the majority of growth in the beef cow herd can be attributed to three states: Texas (+135,000), South Dakota (+67,000), and Oklahoma (+62,000). Combined, these three states saw beef cow herd growth of 264,000 head and were major contributors to the U.S. beef cow herd growth of 299,500 head. One difference between these three states is that South Dakota and Oklahoma have surpassed their 2010 beef cow inventory levels while Texas is about 485,000 head lower. Texas (-9.4%), Montana (-1.2%) and Kentucky (-5%) are the only states in the top 10 of beef cow inventory with lower cow herds than in 2010.

These inventory responses generally align with market performance over the past two years: prices have been strong enough for nearly flat or slow expansion but not high enough for the rapid expansion seen just a few years ago. We are not yet talking about herd contraction, but we are unlikely to see large calf crop increases the next few years without a large and sustained price rally.

USDA Cattle Supply Reports: Round 1

USDA is catching up on lost time by releasing reports originally scheduled during the shutdown. Last week, the January Cattle on Feed report was released. This week, the annual USDA Cattle report will be released on February 28th. Then, the February Cattle on Feed report will be released on March 8th followed by the March Cattle on Feed report on March 22. Altogether, USDA will release three (normally) monthly Cattle on Feed reports and one annual Cattle report in a 30-day span. These reports are pieces of the supply side of the equation when trying to forecast prices.

The January Cattle on Feed report released last week estimated the feedlot activity during December 2018. Placements were the surprise of the report as the came in 1.8% lower than a year ago when the general expectation was for a 2% increase. It seems that weather and muddy feedlot conditions kept placements lower than would have been seasonally expected. Weather is definitely impacting at least some of the cattle flow this year. One impact at this point on markets at this point is that weather is impacting the flow of cattle into feedlots. This is seen in the lower placement numbers than seasonally expected during the last months of 2018. That can at least in part be attributed to poor feedlot conditions. December was the fourth consecutive month with placements lower than the year prior. This will affect the supply of market-ready cattle in the Spring months and also probably suggests larger placements of cattle this Spring. It seems the futures market is paying attention to this as the April and even June Live Cattle contracts are trading at a pretty significant premium to the August contract.

 

The January COF report is mostly positive for prices, but likely doesn’t really move the needle much because of the delay. We are just now getting information on what happened in December. The true value in this report is that it sets a baseline for expectations for the February report to be released next week.

The USDA Cattle report coming this week is perhaps the most important to producers in the Southeast. It is the most comprehensive cattle supply report released throughout the year. This is the report that estimates total cattle inventory and breaks down inventory by state and class as of January 1, 2019. It will also provide a Cattle on Feed number for all feedlots, not just the 1,000 head or above like we get in the monthly reports. The large majority of analysts are calling for a close-to-flat cow herd growth during 2018. Any deviation from that would be a pretty big surprise. I’m looking forward to that report for many reasons including the estimates for herd changes within states.

 

Heifer Price Seasonality

Last week we looked at steer price seasonal patterns in Mississippi (view that post HERE). This week, we are examining the same story but for heifer prices. The back story from last week about why seasonality matters is the same for heifers as it is for steers. Rather than repeat it, I’m going to focus on some seasonal differences between steers and heifers.

The graph above is a seasonal price index that shows how much monthly average prices differ from annual average prices. This is calculated by dividing each month’s average price by the average annual price. Next, the monthly average across the years of data is calculated to obtain an average price index. The price index calculated in this article has a base value of 1. This implies that if a given months price index is 1, the average price in that month is equal to the average annual price. If a monthly index value is 1.05, then the average price in that month is five percent higher than the annual average.

Mississippi heifer prices over the past 7 years in Mississippi generally follow the same pattern as steer prices – higher prices in the early Spring months and lower prices in the Fall. A few key differences stand out though when we look at specific weight classes. The percentage range is larger with heifers for some lasses. 500-600 pound steers range from 7% higher than average in March to 8% lower than average in October. For heifers, the range is 6% high and 12% low — an 18% range in a “normal” year. The length of time those five-weight heifers are seasonally lower on average also lasts longer than for steers as November is even lower than October. The “Low” for each weight class is lower for heifers than it is for steers. Remember, these “Lows” are relative to the annual average price for each sex.

There are a few caveats that are worth mentioning here. In general, there are more steers sold in each weight group than heifers and thus the price data each week is probably a little accurate for steers than heifers. If there are few heifers traded in a week but those few are really good (or bad), that can strongly influence those prices. Because this analysis was done over seven years, those issues are outweighed by values other years and no single week has a huge impact on the index.