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.

August 2018 Cattle on Feed Report

The latest USDA Cattle on Feed report was released this past Friday. This report included estimates for the number of cattle placed into feedlots, marketed out of feedlots, and the total number of cattle on feed for the month of July ending on August 1, 2018.

The report showed a 7.9 percent increase in cattle placed during July 2018 as compared to 2018. This was higher than the average pre-report expectation of a 5 to 6 percent increase but was within the range of estimates. While the total number of placements might get the most attention, perhaps the most interesting information lies in the weight categories.

The less than 600 pounds category was up 13.9 percent over last July and the 600 to 699 category was up 23.4 percent. This increase corresponds with the increased auction receipts of lighter weight feeders in July. The total increase of cattle placed weighing less than 800 pounds was 135,000 head or 13.8 percent over July 2017. Placement of cattle weighing more than 800 pounds was about the same as a year ago.

Marketings were up 5 percent over July 2018 which was very close to pre-report expectations. There was one additional slaughter day in July 2018 as compared to 2017 so the daily average was approximately the same. While we continue to see record large number of cattle on feed, the marketing rate is mostly keeping pace and working through the large supplies.

The total number of cattle on feed estimate landed at 11.09 million head for August 1. This is 489,000 more than the same date in 2017 and is (again) the largest August 1 total on record going back to the start of the report in 1996. This is a 4.6 percent increase over August 1, 2017.

The summer has been a bit surprising in the continued large number of placements. Back in the Spring, the large number of lightweight cattle placed provided evidence for projected similar to year-ago total cattle on feed numbers by August and September. The rationale was that those larger lightweight placements earlier in the year would lead to fewer heavier cattle to place in the summer. However, continued large placements have occurred and total cattle on feed is still pushing 5 percent above year-ago levels as we head into the seasonally heavy-placement Fall months.





Cattle Market Update

2018 has been both an interesting and somewhat steady year for the cattle market. Large supplies, record exports, and trade concerns are just a few of the topics that have dominated the headlines. We are now fully transitioning into the primary calf selling (and buying) time of the year for most producers in the southeast. I’m going to try to sum up a few of the more prominent factors and discuss how they could impact cattle prices this fall. Mixed in with my comments are comments from LMIC.

Larger beef production continues to put downward pressure on prices. Beef production rose by 6.8% in 2016, 3.8% in 2017, 4.2% projected for 2018, and 1.4% projected for 2019. Put it all together and that would be about a 17 percent increase in beef production in just four years. This would be the fastest four-year growth since 1973-1977. The good news for prices is that smaller expected increase in 2019. All signs are pointing to slower herd expansion in 2018 and 2019. The U.S beef cattle sector is well into the cyclical adjustment phase transitioning from aggressive herd expansion to very modest growth. Looking ahead, smaller herd growth rates will translate into the rather modest year-over-year increase in beef production in 2019 and 2020. Further, if recent cowherd trends persist, 2020 could mark the end of the current U.S. cattle inventory build-up.

While large supplies remain the biggest headwind to stronger prices, strong domestic and international demand for U.S. beef is supporting prices higher than might have been expected. A strong domestic economy is supporting beef sales despite larger supplies of beef and competing proteins chicken and pork. Internationally, robust exports have supported the demand profile for beef and hence cattle. January through May exports were 14.5% larger than the same period in 2017 — and 2017 was a great export year.

Interestingly, feeder cattle prices have fared relatively better than live cattle prices this year. Production and disappearance forecasts suggest fed cattle prices below a year ago. 2018 fed cattle prices are expected to average 2% to 4% below 2017 while calf and yearling prices are expected to be very similar to both 2016 and 2017 levels. One driver is lower corn prices. The latest USDA estimates for corn production call for another big corn crop on top of already large supplies. This is providing support for feeder cattle prices because it makes it less expensive to add pounds.

Looking at the rest of 2018, I expect that we will see prices a little lower than during the same period of 2017. We typically see seasonal declines heading into September and October and the large supplies of calves this year provide some reasoning for that seasonal pattern to hold this year. As shown in the chart above, 2017 was a strange year in that we didn’t see much seasonal price decline in spite of larger supplies.

Looking beyond 2018, the slower herd growth numbers begin to paint a brighter price picture for 2019 and 2020. If the domestic economy holds up or grows and exports continue to gain steam, it is not difficult to see higher prices in the Fall of 2019 compared to Fall 2018.

Observations from Other Economists

This week’s article is a little different from usual, but hopefully one that you’ll enjoy. I was in Washington D.C. over the weekend at the Agricultural and Applied Economics annual meeting. This is our national association and it brings together applied economists from around the world studying nearly every topic you can imagine. Naturally, I spent my time in the livestock and marketing sessions and I wanted to share a few short summaries of issues currently being studied by other economists.

Retail Price Dynamics for Beef. One presentation by USDA Economic Research Service discussed how they are updating their forecast methods for beef prices. Specifically, they are looking at wholesale to retail price spreads. This is a topic I find interesting because I’ve been paying attention to the changing farm to retail price spread. As shown in the figure below, the value of a choice steer as a percent of the retail beef value has declined over the past few years. Another way to say that is that live animal prices have declined more relative to beef prices. This is an indicator of strong beef demand in the face of larger supplies, but one drawback to the data is the retail price doesn’t include special pricing such as holiday sales or weekly specials which would lower the retail beef price.

Major Disease Issues in Livestock Production. Dr. Dustin Pendell at Kansas State University discussed some of the major diseases that affect livestock production. For cattle specifically, Bovine Respiratory Disease (BRD) was a big topic. He pointed to a prior study from 2011 that suggested 22% of feedlot cattle were affected by BRD. Another interesting point he discussed was the movement of the National Bio and Agro-Defense Facility currently under construction in Manhatten, KS. Beginning in 2022, this will be a state-of-the-art biocontainment laboratory for the study of diseases that threaten both America’s animal agricultural industry and public health. More information is available HERE .

Antibiotic Use Restrictions. Related to the animal disease issues, economists at USDA ERS presented on research surrounding the recent antibiotic use restrictions. Specifically, the Veterinary Feed Directive (VFD) and the ability to use antibiotics for treatment but not for prevention. The research team is looking at the economic impact of recent rules that limit antibiotic use. What is happening pre and post implementation? The research is ongoing. It is possible that vet costs are rising due to the increased oversight. The team is also interested in the profile of the consumers who demand antibiotic-free.

State of the Cattle Cycle

One of the most interesting questions that I always enjoying discussing is the state of the cattle cycle. The cattle cycle is the path of cattle inventory from low to peak and back to the low point again. Our current cattle cycle began during the 2014 low-point in cattle inventory that spurred record prices. This began the eighth cattle cycle since 1938 with each ranging from 9 to 14 years.

These cycles are interesting for a few main reasons. First, it is important. National cattle supplies influence cattle prices in the Southeast. Second, it is a long-term game. It’s not something that is going to help us estimate what prices will do next week. It’s a discussion about estimating the supply impact on prices over the next few years. Lastly, it is interesting because we have data to use. The USDA Cattle inventory report comes out in January and July (usually). The January report is more comprehensive and overall the best measure. However, the July report also sheds some mid-year light on the current state of the cattle cycle.

Shown in the charts above, a few of the points that stand out in the July report recently released is the estimate of the 2018 calf crop and the estimate of the number of beef heifers held for replacement. The 2018 calf crop estimate came in at 36.5 million head. This is up approximately 2 percent over July of 2017. It also represents an almost three million head increase since the low-point in 2014. The second chart is the number of heifers held as beef cow replacements. As shown, that number is lower than last year which indicates slowing herd expansion. It’s important to note that slowing expansion is different from declines.

Put these points and many others together and we see that the herd has probably continued to grow slowly in 2018. But 2019 or 2020 could potentially be the next peak in the cattle inventory number and the high point in the current cycle.

Lower Feeder Cattle Price Volatility

The following article is from the Livestock Marketing Information Center. It discusses an interesting topic about which I have spoken with many of you at various meetings. After years of dramatic price swings (high volatility), markets have settled significantly to lower levels of variability. While the article uses Oklahoma City as an example, the story is true for markets across the Southeast. 

By the numbers, cattle producers with summer stockers and cow-calf operations should be experiencing a bit less stress about the market this year. Yearling steer prices (750- to 800-pound at Oklahoma City) averaged $145.13 per cwt. during the first six months of the year, up from 138.68 over the same months in 2017. The same comparison for steer calves showed this year’s average price for the first six months at $176.98 per cwt. compared to $167.37 over the comparable span last year.

The increase in value was achieved while price swings in the market have subsided. The spread between the low and high prices during the first 26 weeks of 2018 was $17.77 per cwt. for yearling steers. Last year, the swing in prices from the high to the low for the same weeks was $34.82.

Analysis of annual yearling price volatility going back to 1992 shows that price swings this year are on track to be the smallest since 2012. Managing price swings is a challenge in the process of marketing cattle. Based on monthly average prices, annual price swings from 1992-2002 never topped $20 per cwt. Since 2012, annual price swings have been greater than $30 per cwt. every year. In 2011 and 2012, the high-to-low price swings were $19.49 and $18.34, respectively. Annual price swings greater than $70.00 a year were encountered in 2014 and 2015. During the last 25 years, the most frequent annual price range was $15-$20 (6 years). So far this year, the swing in monthly average prices has been $9.39. The difference between in the magnitude of price swings based on weekly versus monthly data makes a statement about how much price volatility has been experienced within some of the months, even though price volatility has been less than in past years.

Yearling steer prices at Oklahoma City (750- to 800-pound, medium and large frame #1) in the latest week averaged $151.67 per cwt. The low monthly average price so far this year was $139.90. Given the price volatility that has been seen in the market in the first half of the year, an annual price range of $15-$20 has the highest probability, which infers that the chances for prices above $160 would not be a strong bet. It is also worth noting that the high monthly average price so far this year is only $149.29, making the current cash price look very good versus the monthly average to-date.

With the new corn crop looking good, feeder prices have responded well in anticipation of lower feed costs.  Feedlots have been aggressively bidding for cattle. Cash prices out of Western Kansas which had been dogging (negative basis) the August feeder cattle contract for weeks, suddenly flipped on the week of the acreage report. In the 4th year of expansion, aggressive cash bidders are a good sign for the industry even if it comes with some added volatility in the second half of the year.

Income and Meat Demand

The figure above comes from an interesting new article published in the American Journal of Agricultural Economics. The authors use consumption data for seven food categories in more than 100 countries (including the U.S.) to see how food demand changes with income and population. In particular, let’s look at the area shaded red in the figure which refers to meat and seafood. The figure shows that as income increases, consumers demand less starchy staples and more meat and seafood among others. Within this meat and seafood category is beef.

Not only do consumers demand more meat, but also more food in general. Note that at a per capita annual income of $500, consumers food demands are just below 2,000 calories per day and very little meat and seafood. For consumers with incomes greater than $25,000, demand increases to over 3,000 calories with significantly larger meat and seafood demand. Those may sound like low annual incomes to U.S. readers, but the average for the countries used was just over $15,000. Here is a link to per capita incomes around the world if you’re interested.

This research is especially insightful for beef and other protein producers. This figure explains why growing middle classes in other countries can boost beef sales. Think of a country with a low but growing per-capita income (hello China at $17,000). Now project out what demand for meat will be for that country over the next decade or more as incomes rise. The authors take a stab at this, too. They project that between 2010 and 2050, demand for meat and seafood will double due to income and population effects. While increased population matters, the biggest driver for this category is projected to be the income effect.

We’ve all heard (and probably used) the projection of needing to feed 10 billion people worldwide by the year 2050 as support for agriculture in general. However, for animal protein producers, that number is compounded by the expected rise in incomes as countries develop. This also suggests that perhaps the biggest demand growth for meat will occur outside the U.S. – in countries that have the most room to grow their income.

Abundance Feedstuffs Lend Strength to Calf Prices

This week’s article comes from Dr. Stephen Koontz at Colorado State University. I found it relevant – especially since we discussed the relationship between corn and feeder cattle prices in this newsletter a few weeks back feedstuffs (Available Here). 

Friday’s USDA NASS Acreage report showed 89.1 million acres of corn planted and 89.6 million acres of soybeans. The corn acreage is an increase from the 88.0 million acres of intentions from the March Prospective Plantings report. The record cold April transitioned into a record warm May for most of the upper Midwestern states. The slow start to planting finished on schedule and crop conditions are largely good to excellent. Harvest corn futures have decreased almost $1 per bushel and cow-quality hay is clearly abundant. The only places in the country without much pasture are south and west of southwestern Kansas. The weakening feed market has translated into strengthening calf prices relative to the fed cattle and beef market. The overall protein market outlook is much the same as the beginning of summer: there is a lot of protein to come to market through the summer and fall – and no end to the potential trade gymnastics – but calf market outlook is holding strong largely because of cheapening feed.

The higher planted acreage and good feed crop conditions were largely revealed through June. The DEC18 corn contract decreased from the low-$4s to the mid-$3s the last half of the month. Therefore, the Acreage report was probably not much of a surprise. Further, it is the week of July 4th and the majority of the corn crop will be made at the end of this week – or for certain next. It seems unlikely there will be sufficient weather surprises for the rest of the summer to strengthen the feedstuffs markets. If anything there may be delayed maturity problems with the excellent moisture in the upper Midwest and eastern Corn Belt. This will be revealed much closer to harvest and I anticipate these to be minor and local. In the end this is good news for cow-calf producers. Risk management positions might be lightened while options still have considerable time-value.

However, longer term caution is still warranted. Cattle on feed numbers, slaughter weights, and competing meat volumes all remain substantial. Beef trade volumes are strong but one wonders if this is filling the pipeline early to avoid problems later. For the short-term though, the market is revealing the abundant supplies of feedstuffs.

Hay Acreage in the Southeast


The USDA Acreage report was released by the National Agricultural Statistics Service this past Friday. This once a year report usually grabs headlines due to its estimates of acreage of crops such as corn, wheat, cotton, and soybeans. It is often one of the most volatile trading days for those commodities as markets absorb the newest information and traders adjust their forecasts for future production.

The USDA Acreage report was released by the National Agricultural Statistics Service this past Friday. This once a year report usually grabs headlines due to its estimates of acreage of crops such as corn, wheat, cotton, and soybeans. It is often one of the most volatile trading days for those commodities as markets absorb the newest information and traders adjust their forecasts for future production.

While row crops grab most of the headlines, this report also sheds light on hay production for the past year and provides estimates for the upcoming year. Most hay producers in the Southeast are firmly in the middle of another hay season and this report provides estimates on what hay producers in each state and around the country are doing this summer.

Acreage of hay production in the Southeastern U.S. is expected to grow by 6.5 percent in 2018 as compared to 2017. This would be a 755,000 acre increase. This would be the first increase in hay acreage for the region since 2013 and only the second since 2008.

Missouri accounts for the majority of the increase in the Southeast region with 530,000 acres more hay than during 2017. This would be a 17.7 percent increase. Tennesse is next with a 103,000 acre increase and Kentucky is third with a 90,000 acre projected increase. Mississippi is expected to have slightly lower hay acreage – down 20,000 acres or about 3 percent.

For the U.S. as a whole, hay acreage was steady from 2016 to 2017 but USDA is projecting a 1.3 million acre increase in hay acres in 2018. This would be a 2.4 percent increase. Missouri is forecasted to see the largest increase in the U.S.

So what is driving these trends? Anytime hay acres increase or decrease, that land is instead used for something else. This is usually driven by the economic concept of opportunity cost which refers to the value of the next best alternative use. I mentioned that 2018 would be just the second year of increased acres since 2008. The two year period of 2007 and 2008 was the beginning of a record high grain prices that led farmers to pull as much land as possible into row crop production. In the following years, the opportunity cost of hay acreage that could instead be planted in corn or soybeans was really high.

However, corn and soybean prices haven’t touched those record-high levels in the last few years. In fact, the margins in most row-crop production have been very slim for most commodities. That has farmers considering the opportunity cost of land again. The projected boost in hay acres in the Southeast suggests that some producers – especially in Missouri – are placing a higher value on hay production than their next best alternative.