Cattle market uncertainty may require more careful fall decision making

LEXINGTON, Ky. – Cattle producers are enjoying a bullish market in the first half of 2004 that has shown no recent sign of softening.

But, University of Kentucky agricultural economists urge producers to weigh the benefits and risks when making fall marketing decisions.

Prices remain high. “Feedlot profitability will be a crucial factor driving marketing decisions in the second half of 2004,” said Lee Meyer, an Extension agricultural economist with the University of Kentucky’s College of Agriculture.

“Prices remain at astronomical levels, surpassing even the most optimistic projections made in the first quarter.”

Currently, live cattle are trading near $90 per hundredweight at $87.

Kentucky average prices for quality seven-weight feeder steers are exceeding $100 per hundredweight and are considerably higher in some locations, said Kenny Burdine, University of Kentucky Extension associate for livestock marketing.

Calf prices also high. He said calf prices also remain high. Tight supplies and high consumer demand are driving prices and seem to be outweighing potentially volatile grain prices and reasonable uncertainty about the opening of the Canadian border to trade.

“Feeder cattle futures’ prices have shown a steady uptrend since April,” Meyer said.

“Backgrounders who worried about the profitability to summer grazing programs are now being offered attractive forward pricing opportunities.”

Feedlot closeouts. For all of 2003, feedlot closeouts (profit/loss status) were in the black, reaching an all-time high in October.

After a single cow was discovered to have BSE just before Christmas, feedlot closeouts moved into the red in January 2004 for the first time in 13 months.

Many analysts predicted that closeouts would remain in the red for a long time but, according to the Livestock Marketing Information Center, recent strength in the fed cattle market sent May 2004 closeouts above $50 per head.

“If fed cattle prices can remain in the upper $80s, feedlots will likely remain profitable as we move into mid-summer,” Burdine said.

Profitable May. A profitable May just seemed to add strength to the bullish feeder cattle trend.

Feeder cattle prices in the Midwest have run in the $105 to $115 per hundredweight range for the past few weeks.

Meyer said many people are starting to wonder if the feeder prices are justified.

“It’s not clear that feedlots will remain profitable into the fall based on prices they are currently paying for feeders,” he said.

“Consider the following: a 750-pound steer placed on feed in early June represented a cost to the feedlot of about $800. Based on an expected cost-per-pound-of-grain around $0.60, breakevens on these calves will likely be in the low-nineties when they reach the market this fall.”

Cattle futures. As of July 6, October live cattle futures were trading just above $86. “Clearly traders are being more optimistic than the futures market as they bid on feeder cattle,” Meyer continued.

“They continue to bid more than $5 per hundredweight above futures-based breakevens. If futures-based price predictions for fall are accurate, feedlots will likely lose more than $50 per head.

Of course, this was also the case in early 2004 and feedlot operators have turned out to be correct as evidenced by May closeout numbers.”

Uncertainty remains. June closeout numbers will not be available until mid-July.

Meyer and Burdine said if there was one factor by which to characterize the market, it would be uncertainty.

Since April, December corn futures have traded in a range from $2.80 to $3.40 per bushel.

Boxed beef prices have fluctuated by as much as $12 per hundredweight on a week-to-week basis.

Roller coaster ride. And, Meyer said the industry has been on a roller coaster ride with respect to the opening of the Canadian border to live cattle and the Japanese export market.

Current slaughter weights and the recent narrowing of Choice/Select price spread may suggest that feedlots are not as current as they once were, Burdine said.

“These factors are likely to set the tone for the cattle market in the second half of 2004,” he said. “It should make for a very interesting fall cattle market.”

Optimistic view. Regardless, Meyer believes that current feeder cattle prices are based on a very optimistic view of the fall market, which most likely includes regaining the Japanese export market, strong boxed beef prices, stable grain prices and only moderate increases in slaughter weights.

“While some potential market upside does exist, considerable downside market risk is also present,” Meyer said.

“Producers planning to market cattle in the fall may want to consider forward pricing opportunities that currently exist as a way to lower the risk. The best marketers aren’t the ones who always sell at the best possible time; they are often the ones who try to always sell at a good time.”