Fed Cattle

Fed cattle traded $1 to $2 lower compared to last week on a live basis. Prices in the South were mainly $178 to $179 while dressed prices were mainly $288 to $290.

The 5-area weighted average prices thru Thursday were $180.41 live, down $2.26 compared to last week and $288.58 dressed, down $1.27 from a week ago. A year ago, prices were $146.10 live and $233.94 dressed.

Finished cattle prices are battling the heat, but they are holding their ground. The expectation was and continues to be a softening of finished cattle prices moving through the heat of summer. Prices have declined from their highs, but further price declines are likely from a seasonal perspective.

The primary supporting factors of finished cattle prices include knowing there are fewer cattle to be purchased moving into the foreseeable future and the strength of beef demand. These two factors will keep packers competing for cattle coming off feed as it is necessary to keep lines operating. The feedlot manager knows packers need cattle so they will hold their line for many months to come.

Beef Cutout

At midday Friday, the Choice cutout was $327.89 down $0.16 from Thursday and down $6.57 from a week ago. The Select cutout was $295.54 down $1.64 from Thursday and down $5.36 from last week. The Choice Select spread was $32.35 compared to $33.56 a week ago.

The headlines this week have been beef demand defying gravity. This may or may not be the case. What is certain is consumers continued strong demand for high quality beef. Over the past decade, consumers have made it clear that they prefer and desire Choice quality beef or a higher grade.

The three primary grades of beef are Prime, Choice, and Select. These are three discrete grades, but quality grade is actually a continuous variable in that there can be considerable variation in Choice beef that barely exceeds Select grade and beef that is high Choice and knocking on the door of Prime. Consumer purchasing habits produce the data that says “we want Choice or higher beef.” Consumer willingness to pay for beef in the high price environment provides further support for this when considering the Choice Select spread.

The clear market signal is consumers want high quality grade beef. The question that comes to mind that may be for 10 or 50 years down the road is if the market needs to establish a beef grade higher than Prime.

Outlook

Based on Tennessee weekly auction price averages, steer prices were $3 to $10 lower this week compared to last week while heifer prices were $5 to $15 lower compared to the previous week. Slaughter cow prices were $2 to $3 higher compared to last week while slaughter bull prices were $2 to $4 higher compared to a week ago. It would seem higher temperatures are slowing interest in lightweight cattle as prices took a hit this week.

However, commodity markets in general seem absolutely confused, which simply means those trading the futures are absolutely confused. It is reminiscent of the good ole boy saying “Hold my beer and watch this!” Everyone knows it is rare for anything good to follow that statement. Commodity futures traders have essentially said this based on how markets have traded the past couple of weeks. It makes one think most traders are drinking something stouter than beer. This is certainly strong language, but there are currently two gaps in most feeder cattle contracts. A gap in futures trading occurs when a certain price range has no trades in it.

For instance, The August feeder cattle contract gapped lower on June 21 with the low price on June 20 being $232.15 and the high price for June 21 being $230.65, which provided a gap between those two prices. The market gapped higher on the June 23 with the high on the 22 being $230.93 and the low on the 23rd being $231.40. These trades filled part of the previous gap, but it did not fill the entire gap. The market gapped higher again on June 27 between $235.25 and $235.75. Gaps are typically filled at some point, but not always.

Given the volatility in this market, there is a strong likelihood these gaps will be filled, which means futures prices are likely to move lower. This is not meant to be a technical discussion with a passel of numbers. It is simply a discussion to aid in managing price risk.