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.

Uncertainty is Impacting Cattle Prices

This week’s article was written by Dr. Derrell Peel at Oklahoma State University and is a great addition to the discussion on trade from last week available here

Cattle and beef markets have decreased from April highs with uncertainty in a variety of factors weighing on markets the past month.   The latest threat of additional tariffs on Mexico rattled many markets last week, including cattle and beef markets.  It appears that the threat was removed over the weekend and cash and futures markets may stabilize somewhat this week; but ongoing uncertainty about trade and the politics of trade continue to take a toll on agricultural and other markets.

Weather is another source of uncertainty negatively impacting cattle markets.  While good moisture conditions bodes well for forage growth in general, ongoing flooding and excessively wet conditions is limiting grazing and hay production in some regions.  Sloppy feedlot conditions continue to hamper feedlot production in some areas. Additionally, the record late planting of corn and soybeans this year is adding uncertainty about corn acreage and yield and is beginning to push corn prices higher. There is little doubt that the corn crop will be smaller than anticipated just a few weeks ago but carryover levels are still expected to be adequate. While significantly higher feed prices are not anticipated at this time, the uncertainty remains.

Weaker beef demand may be the biggest threat to cattle and beef markets for the remainder of the year.  Strong beef demand supported cattle and beef markets in 2017 and 2018 but there are signs that some weakness may be developing in beef demand in both domestic and international markets.  While unemployment remains very low, other indications of weakness in the macro-economy are concerning and have led to reduced forecasts for U.S. economic growth in 2019; largely due to ongoing impacts of tariffs and trade disruptions.  Relatively slow domestic income growth and higher prices for major consumer items, such as gasoline, combined with record large supplies of beef, pork and poultry may be limiting domestic beef demand going forward in 2019.  Relatively wet and cold weather thus far has likely stifled summer beef demand somewhat and probably contributed to an early seasonal peak in boxed beef prices and recent weakness in wholesale beef values.

Reduced beef exports and higher beef imports through the first four months of the year, combined with weak pork and broiler exports suggest that the meat complex is struggling so far this year in international markets.  The uncertain but undoubtedly large impact of African Swine Fever in China and other countries, may provide some boost to protein markets in the coming months.  Increased demand in China for pork as well as poultry and beef will likely provide some support, directly and indirectly, to protein markets around the world.  The U.S. exports little beef to China and that’s not likely to change anytime soon, but U.S. beef markets may enjoy some indirect support as a result of the protein deficit in China

The uncertainty plaguing cattle and beef markets probably should not change most producers’ strategic plans for this year but it will be important to watch the multitude of volatile factors that may continue to or further impact markets.  Short run volatility may impact timing and other tactical considerations for production and marketing and highlights the value of flexibility and the ability to be nimble in these uncertain times.

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.

More Heifers in the Feedlot Mix

The latest USDA Cattle on Feed report included the quarterly feedlot inventories for steers and heifers. An estimated 4.5 million head of heifers were on feed on April 1st which is the largest April total on record and the largest total for any quarterly report since January 1, 2001.  The number of heifers on feed was up 7.6 percent year-over-year while the number of steers in feedlots was down 1.1 percent compared to the same time last year.  The mix of heifers and steers in feedlots provides some information about the overall herd changes. During the past 5 years of expansion, heifers in feedlots averaged 34.4 percent of total feedlot inventories. For the two quarterly reports released in 2019, heifers have accounted for 37.7 percent of total feedlot inventories. This information is likely an indication that heifer retention has slowed over the past two quarters.

The total number of cattle in 1,000 or more head feedlots on April 1 feedlot was estimated at just under 12 million head. This was 2 percent larger than a year ago and a record April level going back to at least 1996. March feedlot placements were up about 5 percent. The weather impacts on Nebraska were shown in this report with placements down 11 percent in Nebraska.  The daily average of feedlot marketings was slightly higher in March 2019 compared to a year ago, though the report shows a 3.4 percent decrease for the month. This is due to had one fewer business day in March this year compared to 2018.

Large Estimates Push Corn Prices Lower

The USDA Prospective Plantings and the Quarterly Grain Stocks reports were released at the end of March and showed an increase in expected corn acres above 2018 levels. Corn planted area is estimated at 92.8 million acres which is four percent or about 3.66 million acres above last year. The 92.8 million number was on the high end of expectations going into the report. Combined with larger than expected stocks reported, there was a bearish impact on markets. December Corn futures prices dipped 18 cents in a day in reaction to the reports.

 

The increase in corn acres comes at the expense of soybean acreage. Soybean planted area for 2019 is estimated at 84.6 million acres which is down five percent from last year. Soybean expected margins are very tight as prices continue to be pressured by large supplies and tariff concerns. March 1 soybean stocks were 29 percent larger than a year ago and a record-high 2.72 billion bushels. It should be noted that the survey for the planning report was administered in the first two weeks of March and might not reflect the impact of the major flooding seen in many areas of the country.

So what are the implications for cattle markets? The cattle markets pay attention to corn prices because it is a primary input for adding pounds to cattle. The estimate that there should be plenty of corn this year is positive for feedlot demand. The primary costs associated with a finished steer are the cost of the calf purchased and the cost of the feed. All else equal, if the cost to feed a calf declines, a feedlot operator can pay a higher price for the calf without reducing their expected profit.

Of course planting intentions are not the same as bushels harvested. There is still plenty of uncertainty to go around as farmers navigate another crop season. Volatility in corn markets in the coming months is likely as prices are usually sensitive to weather and crop progress reports. However, the outlook for now is larger corn production and ending stocks and lower corn prices than expected just a few weeks ago.

2019 Meat Production and Consumption

This week’s article is from Dr. Derrell Peel at Oklahoma State University and discusses expected changes in meat production and consumption in the coming years.

Total 2019 meat production in the U.S. is currently projected to reach another record level of 103.3 billion pounds, up 1.3 percent year over year.  However, per capita meat consumption may decrease slightly to 217.3 pounds from the 2018 level of 218.6 pounds.  The decrease in per capita meat consumption reflects improved meat trade with projected decreases in meat imports and increased meat exports along with normal population growth. Total 2019 meat imports are projected to decrease to 4.3 billion pounds, the lowest since 2013, with record meat exports of 17.4 billion pounds.  Total meat includes beef, pork, broiler, turkey, other chicken, veal and lamb.

Record per capita meat consumption occurred in 2004 at 221.9 pounds. At that time lower population, higher meat imports, and meat exports less than half of today’s level were sufficient to increase per capita consumption despite lower total meat production in 2004 which, at 85.1 billion pounds, was 17.6 percent smaller than today.

Beef production in 2019 is projected to increase to another record at 27.2 billion pounds, up about 1.1 percent over last year.  Weather impacts are holding carcass weights well below year ago levels so far this year and annual average carcass weights are projected to only increase slightly year over year.  Cattle slaughter is projected to increase about one percent year over year.  With beef imports projected to decrease and beef exports expected to increase again in 2019, per capita beef consumption is expected to decrease to 56.8 pounds (retail basis), down from 57.1 pounds one year ago.

The March Hogs and Pigs report from USDA-NASS showed continued growth in the U.S. pork industry with year over year increases in all hog, breeding hog and market hog inventories.  Pork production in 2019 is projected to increase about 2.9 percent to 27.1 billion pounds.  Per capita pork consumption is expected to increase slightly from last year to 51.0 pounds per capita.  An improved pork trade balance is projected with year over year decreases in pork imports and significant increases in pork exports.  Higher projected pork exports are partly due to anticipated increases in pork imports in China as a result of losses in Chinese pork production due to African Swine Fever.

Broiler production estimates have been trimmed from earlier expectations with current projections of a 1.1 percent increase in broiler production in 2019 to 42.6 billion pounds.  Per capita broiler consumption is projected to decrease fractionally year over year to 92.0 pounds in 2019 with increased broiler exports taking up most of the increase in production.  Turkey production and consumption are both projected to decrease in 2019.  Total poultry, including broiler, turkey and other chicken production is projected to be fractionally higher in 2019.

These projections reflect estimates and analysis by the Livestock Marketing Information Center and me.  Of course, the estimates are likely to change as market conditions change and new information becomes available.  Many factors may impact meat production and consumption this year including weather, disease, trade, U.S. and global macroeconomic conditions, feed markets and others.

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.