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The Beef Angle

Cattle Slaughter Mix Shifts, Markets Test Margins

While packer margins have improved recently, they remain historically tight. Meanwhile, the mix of cattle going to slaughter continues to shift.

Cattle Slaughter Mix Shifts, Markets Test Margins
Cattle prices are high, the price of corn and other feed grains is high, and the price of gas at the pump feels higher still. The price of commodities, compared even to just 10 years ago, feels high across the board. The market for cattle, however, could be turning lower.

As March dawned, a number of economists and beef industry experts noted that the fundamentals in the marketplace could be leading prices into a seasonal low. On March 5th, Feedstuffs livestock editor Rod Smith noted that packers were experiencing “real financial stress,” and were thus buying slowly, holding back line speeds, and generally trying to tighten beef supplies for the sixth week in a row to drive prices into profitable territory.

Smith pointed out, though, that consumers might not be willing to pick up the packers’ tab. With consumer beef prices averaging $5.09/lb in January, prices were up 7.7 cents from the previous month and up 55.1 cents from the prior year. According to University of Missouri livestock economist Ron Plain, that marked the 23rd month in a row that prices were higher than they had been the prior year.

In February’s feedlot inventory report, the cattle inventory as of Feb. 1 was reported at its largest for that timeframe in four years, with a front-end inventory 12.3% larger than the previous year. As Smith put it in that week’s issue of Feedstuffs, “cattle numbers are increasing, cattle weights are increasing, beef production is increasing and beef prices are choking off demand.”

That led him to conclude, as did Allendale Inc. that week, that cattle prices may post a seasonal high much sooner than normal in 2012. Spring cattle prices, according to Allendale, topped out in mid-March in 2002, 2004 and 2007. The seasonal top actually hit in early February in 2003.

According to the Livestock Marketing Information Center, weekly cattle slaughter this year averaged 40,000 head – roughly 6 percent – below 2011 levels for the first eight weeks of the year. Steer numbers were down 6 percent, heifer numbers were off 10 percent, and cow slaughter were down 1 percent. LMIC also noted that the decline in cow numbers was mostly beef animals, as dairy cow slaughter was down 3 percent compared to beef cow numbers down 12 percent from a year ago. In other words, we’re culling fewer beef cows than we were at this point in 2011.

On the other hand, LMIC noted that the number of dairy calves slaughtered means more dairy animals are entering feedlots, rather than being processed as veal. The implication is that dairy calves represent a much-needed supply of feeder cattle available to feedlots.

Also on March 5, American Farm Bureau Federation senior economist John Anderson put what he referred to as historically tight packer margins into a quantitative context. Using a calculation called the live-to-cutout spread, which calculates the difference between the wholesale value of the carcass and the on-farm value of a live fed steer, Anderson pointed out just how tight margins were in the early part of this year.

“The spread calculated by LMIC bottomed out at just over $25 per head in the third week of January,” he wrote. “That was the lowest weekly margin going back to the beginning of that [data] series in 1991.”

Anderson noted that margins improved significantly in the weeks that followed, reaching $92 per head in the first week of March. That $92 figure, however, was still well below the seasonal five-year average of $125 per head. That week average fed steer price was $129.44, up more than $4/cwt, and carcass value was ballparked at $130/cwt.

In an effort to illustrate what might need to happen for packer margins to get closer to the $125/head usually seen this time of year, Anderson suggested one of two things had to happen: either the beef cutout value needed to pick up another $5/cwt, or live cattle prices needed to crop another $3.50/cwt. The economist concluded that adding $5 to the cutout – meaning a Choice value of more than $200/cwt – was a pretty tall order.

Getting live cattle prices to fall, on the other hand, appears to have been a much easier task given the reasons Smith addressed in Feedstuffs. Since March 1, live cattle futures in Chicago have dropped roughly $7, and feeder cattle futures have dropped $8-9. The markets for cattle and beef are fairly precarious, and consumers appear to be paying very close attention to expenditures at the grocery store.

It could be an interesting spring in cattle country.

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