May 1, 2003

 

Market Advisor: Fed Cattle Situation and Outlook

By Tim Petry, Livestock Economist
NDSU Extension Service

Spring calving in the Northern Plains is more than 80 percent finished. Cattle producers are looking forward to a new marketing year, but those who have retained ownership or have purchased feeder cattle must finish marketing last year’s calf crop.

Some 2002 calves that were placed on high-concentrate rations last fall have already been harvested at generally profitable prices. Most calves that were backgrounded, except heifers that were retained for breeding purposes, are now in feedlots and will be marketed as fed cattle in the next few months. What fundamental factors are affecting fed cattle prices now?

Prices for Choice fed steers in Nebraska averaged $77.82 per hundredweight in the first quarter of 2003, compared to $70.19 during the same time a year ago. The adage "positive fundamentals create positive fundamentals and negative fundamentals create negative fundamentals" seems to appropriately reflect the current fed cattle price situation.

Cyclically declining cow numbers, due mainly to drought in much of the Northern Plains and Western cattle-producing area, has reduced cattle-on-feed numbers. Fed cattle market weights are continuing to move lower than last year so beef production is at lower levels than the previous year.

Demand for beef has been increasing which has drawn down cold storage stocks of beef. Good overseas demand has caused higher hide and offal values. The progression of all these positive fundamental factors has caused higher prices this year.

Market observers need only look back to the period after the Sept. 11, 2001, terrorist acts to see how a host of negative fundamental factors can affect the market. Demand for beef fell as people reduced traveling and eating at white tablecloth restaurants. Feedlots, expecting prices to turn around, held cattle on feed which increased market weights, resulted in higher beef production, and caused prices to decline further.

Poor overseas economies caused hide and offal values to decline because much of those commodities are exported. The discovery of mad cow disease in Japan affected beef demand in that country and sharply reduced U.S. exports. Furthermore, an outbreak of Asian influenza on the East Coast caused other countries to ban chicken from the United States, which meant very low chicken prices competed with the higher priced beef in supermarkets. This snowballing of negative fundamentals caused Choice fed steer prices to average $65.13 per hundredweight in the fourth quarter, 2001. It took much of 2002 for the market to overcome these factors.

Currently, the USDA-National Agricultural Statistics Service’s monthly Cattle on Feed report, released on April 17, continued to show inventories below last year. USDA reported 10.7 million head of cattle in feedlots, 8 percent below 2002, and 7 percent below 2001.

According to USDA-National Agricultural Statistics Service’s monthly Cold Storage report, released April 21, frozen beef stocks totaled 401 million pounds. That was down nine million pounds (2.3 percent) from 2002.

Furthermore, aggressive marketing rates from feedlots have caused cattle weights to decline significantly from last year’s burdensome levels. For the week ending April 26, beef production was 490.9 million pounds compared to 515.9 million pounds for the same week one year ago.

Aggressive marketings have caused the Choice/Select price spread to widen. The spread usually widens seasonally this time of the year, but fewer Choice cattle in the mix has caused the premium for them to increase more than normal. Feedlots that have recently sold Select grade cattle on grids are well aware of the steep discounts. The spread is likely to widen even more during the next month.

Producers will need to carefully analyze the tradeoff between feeding longer for Choice grade premiums, versus marketing earlier before seasonal price declines occur with the increased slaughter levels during the summer months.

The USDA-Economic Research Service is predicting Choice steer prices to average in the mid $70 per hundredweight in the next few months. That is about $10 higher than last summer’s average prices, but seasonally lower than current levels. Summer live cattle futures contracts are trading in the high $60's. If strong basis levels continue, aggressive marketings can be expected.

Cattle feeders should be aware that the Chicago Mercantile Exchange is now offering live cattle futures contracts for each month of the year. Historically, contracts were available every other month in February, April, June, August, October and December. These contracts begin trading about 13 months before maturity.

Now, the serial (odd) months including January, March, May, July, September and November will also be available, but will only be traded during the last four months prior to expiration. All contracts expire on the last business day of the contract month. May and July contracts are trading now and September will begin trading in June.

Cattle feeders considering using the serial month contracts should consult with their broker to make sure that volume and open interest levels are sufficient to assure liquidity.

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Source: Tim Petry, (701) 231-7469, tpetry@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu