Cattle Market

Cut it any way you want. Beef's market bulls are starting to look like they're leaking a little testosterone.

True, the numbers still ring strong. USDA projects 2015 will close with average annual prices for feeder steers in the $216 to $221 range, an increase from the 2014 annual average of $202.82*. But there is a shift in the fundamentals. The industry is now at a place where market economists are encouraging producers to meditate on their cost of production -- usually a good indicator any party is almost over.

Texas A&M Extension economist David Anderson said today's market signals are definitely telling the industry to start paying attention.

"It's time to think about costs and where you are spending money. Focus on those things that bring you a return. When prices are good, it's easy not to worry as much about costs. But record-high prices don't last forever," he explained.

CALF MARKET SET TO EXPAND

Two factors are fundamental and crucial to the direction prices will take this fall and winter. Those factors are herd size and feed prices.

While tight supplies remain the overriding market factor, Anderson points out this year started with 2% more cows in the herd, and it's reasonable to assume that would mean 2% more calves.

As a result of increasing supplies, the economist projects an 8% to 10% decline in prices for 500- to 600-pound feeder steers. On 750-pound feeder cattle, he sees that decline at 13%. Those projections are for the last quarter of this year compared to the last quarter of 2014. USDA forecasts prices for feeder steers the last quarter of 2015 will range from $222 per cwt to $234 per cwt. For comparison, in the last quarter of 2014, prices held at $234.25 per cwt.

"We are still talking historically high prices," Anderson noted. "These would be the second-highest prices on record for the quarter after last year. So these are still darn good calf prices."

Corn prices will play a heavy hand in the direction calf prices head. In July, USDA reported 100 million fewer bushels of corn would be produced this year compared to 2014. Corn ending stocks for 2015-16 were projected at 172 million bushels lower. Season-average prices for corn to the producer had the commodity up 25 cents per bushel to a range of $3.45 to $4.05 per bushel.

Anderson said higher corn prices will increase feed costs to the point that feedlot operators will have to lower bids for calves.

"Last year, we benefitted from a big decline in feed prices due to the record-size corn crop. That helped fall calf prices go up counter-seasonally. This year, I don't think that will happen, although the market has been slow to respond to higher corn prices," he added.

That counter-seasonal upturn in fall calf prices last year left some producers who had forward-contracted feeling they'd left money on the table. This year, however, Anderson said he thinks a forward contract may offer opportunities.

"In a declining market, you might want to think more about forward-contracting. Whether it's cash or forward contracting, the key is to understand your costs and know what a good price is for you. What are you comfortable with? If you feel better having those animals forward-contracted, then that's a good move for you."

Another market opportunity, Anderson said, will be branding and/or preconditioning programs. He saie as prices decline, these will offer more potential upside to participants.

"In times when supplies are tight and demand is great, buyers are fighting and bidding for the animals they need. It's the sort of market where anything sells, and at a relatively high price," he said. "As supplies expand, however, it's the animals that offer the buyer more that will end up with a bigger premium. That can be a good example of a cost that has a return tied to it."

CULL COW PRICES HOLD

Similar to the calf market, cull cow prices ran counter to the norm, said Derrell Peel, Oklahoma State University livestock market economist. He explained cull cow prices typically show the most pronounced seasonal pattern of any segment of the cattle industry, dropping in the fall and winter. Last year, however, cull cow prices increased from beginning to end.

"This year, it's more of a sideways market," Peel said. "We've maintained the high prices of a year ago, but we are now moving more sideways. That sets up the idea that this may be more of a typical seasonal pattern we are seeing emerge, but my expectation is that we won't see too much of that seasonal drop this year."

As the summer ended, Peel said beef-cow slaughter was down some 17% from year-ago levels. Even with an upturn in cow numbers, he's not expecting normal culling levels this year because of rebuilding of the herd and generally good pasture and range conditions in many of the large cow/calf regions.

The most pronounced price lows for cull cows have typically hit around November, as producers move cows out after weaning. Price recovery generally begins in February, going into May or June. Peel said in a normal season, producers often make a good return holding culls through the winter and putting weight on them to sell in the spring.

"Really, on a dollar-to-dollar basis, it's as good a chance to hit a home run on those culls as anything. They can be a significant contributor to an operation's bottom line. If nothing changes except that you keep her, and she puts on a little weight, you'll sell more pounds, which equals more money."

This year, however, may not be that predictable. Peel, like Anderson, said feed prices will be key to where costs and profit levels point. But, he said if cull cow prices don't take their normal fall dip, producers should not expect to see them make a spring recovery. As a result, the opportunity this year may lie in selling before the end of the year.

"If we are looking at a marginal situation, and the market doesn't drop really low this fall, it may work to turn loose of those cows," he said.

Using Oklahoma averages, Peel points to cull cow prices he characterized as excellent the first week of July at $117 per cwt.

"That is her value as a slaughter cow, which is amazing," he said.

Assuming a normal 10-year average seasonal price pattern from that $117-per-cwt point, cull cow prices would drop to $103 per cwt by November. If that does not happen, and prices remain high as they did in 2014, Peel cautioned the spring increase may not materialize.

FEMALE MARKET GENETICS

One man's culls are often another man's cow herd in today's market, University of Tennessee livestock economist Andrew Griffith said. The strong prices Peel describes in the cull market underscore a trend where both heifers and older cows are bringing higher-than-salvage prices, he explains, because they are going back into herds as breeding stock.

Griffith points to feeder auctions, where 750-pound heifers were bringing $208 per cwt back in February. He says while it's anecdotal, he believes those animals were going into a breeding system.

The same is happening as seedstock operators sell 4- and 5-year-old cows as they bring newer heifers into the herd to improve genetics. Those older cows, Griffith said, are often better genetically than what the average commercial operator has in his herd. They see the purchase of the older, proven cow as a real opportunity to improve genetics without a lot of risk.

"As a seedstock operator today, you can't get rid of animals like a commercial guy," he said. "That 5-year-old cow has tremendous value in this market, especially if she's bred. It's a great way for a commercial operator to build his herd without the risk of buying a bred heifer that may not breed back."

Griffith said buying these cows now and getting calves from them for another four or five years is a great way to build the quality and size of a commercial herd.

He noted in the Southeast bred heifers have been ranging from $2,400 to $2,600 per head. Pairs are ranging from $3,000 to $3,200. Those prices were from May 2015 sales in his region.

"I think heifer prices have leveled," he said. "We may even see a slight downturn."

Griffith noted as feeder prices begin to push back, the cow/calf and stocker producer will have to pay less for heifers or cows. He believes the market is already seeing these adjustments.

"We can't expect prices to stay where they've been for nine or 10 more years," he said. "It's time to focus on risk management, make good decisions and know your costs. That will help us make the most of whatever the market throws our way in the year to come."

(VM/CZ)

Copyright 2015 DTN/The Progressive Farmer. All rights reserved.