By John Gates/Northwest Farm Credit Services
Cattle markets face mixed signals entering the third quarter of 2013. Key market drivers include: 1) Improved weather: Pasture and forage conditions throughout most of the U.S. have improved. Exceptions include Idaho and Oregon. 2) Supply and demand contrasts: The outlook for improved grazing and forage conditions, matched with a small cattle supply, support feeder cattle producers’ hope for higher prices. Conversely, demand for beef in domestic and export markets is relatively weak and feedlots are cautious in purchasing high-priced feeders. 3) Tight feed grain supplies: Old crop corn prices remain high, while uncertainty surrounding the 2013 crop is pressuring new crop corn prices. 4) U.S. economic growth: The National Restaurant Association’s Restaurant Performance Index currently signals expanding beef demand. Longer-term, consistent U.S. GDP growth of 3 percent would sustain beef demand.
Price Discussion
Unlike prior years, feeder cattle cash prices didn’t rally between January and April this year. Reasons for a stymied rally include lower fed cattle prices, drought concerns, high feed costs and limited feed availability. Cash market prices for 550 pound and 750 pound feeder steers fell an average of 8 percent since January 2013. Fed cattle prices have remained relatively flat during the same period.
June kicked off the start the video sale season and initiatiated the direction for fall feeder prices. The first Superior Video auction was held June 11 – 12. Superior Video region 1 includes California, Nevada, Idaho, Oregon and Washington. Region 2 includes Colorado, Montana, Nebraska, North Dakota, South Dakota, Utah and Wyoming. June video prices for 550 to 600 pound steer calves in Region 1 and 2 ranged between $156 to $170 per cwt. Yearlings weighing between 800 and 850 lbs. sold for $136 to $138 per cwt. Overall, prices are $15 to $20 per cwt. lower than prior year prices.
Corn prices are also influencing feeder cattle markets. Corn prices have remained high, supported by tight U.S. feed grain supplies. Old crop corn prices are currently more than $6.50 per bushel. Uncertainty surrounding 2013 new crop corn is supporting prices between $5.50 and $6.00 per bushel. New crop corn prices may fall if Midwest growing season conditions improve, including both warming and drying out. Lower corn prices support higher calf and feeder cattle prices.
Supply and Demand
Drought has accelerated tightening cattle supplies in recent years. The January 2013 USDA beef cattle inventory was 29.3 million head, down 3 percent from 2012. By yearend 2013, the USDA projects feed steer and heifer slaughter down 4.9 million head, or 13 percent, from 2001. Although rain throughout much of the U.S. will slow cow slaughter and moderate cattle supplies, the overall beef cattle herd will decline in 2013.
Domestic and export demand remain lackluster. The U.S. Meat and Export Federation reports first quarter exports down 5 percent year over year. Export constraints include a strengthening U.S. dollar and tight cattle inventories. Additionally, drought-based cattle liquidation in Australia and New Zealand are increasing exports and maintaining competitive prices.
Despite falling prices for competing proteins, domestic retail beef prices are expected to continue to climb. However, feedlots remain largely unprofitable, struggling with limited supplies of high priced feed. Consequently, feedlot demand for replacement feeder cattle is limited. On a positive note for cow/calf operators, CattleFax reports feedlot placements for May averaged 745 pounds, 22 pounds heavier than one year ago and the highest average placement weight since 2004. Heavier cattle should finish faster this summer, raising demand for feeder cattle later this summer. Additionally, the National Restaurant Association’s Restaurant Performance Index bodes well for the beef industry, at 101.8 in May. This reflected the third consecutive increase in the index and was the third straight month the index was above the 100 level that signifies industry expansion. The index measures the health and outlook for U.S. restaurants and is an indicator for beef consumption.
Input Costs
Pasture conditions: Forage shortages and dry conditions continue to plague areas of Idaho and Oregon. Pasture conditions in Montana are improved, where producers are less concerned about forage.
Hay: According to the USDA, May 1, 2013 hay stocks in 11 western states are down 26 percent year over year. In the Columbia Basin, prices for fair to good quality hay are between $180 and $215 per ton, while prices in Idaho range from $185 to $235 per ton for feeder quality hay. Prices for good quality hay in Eastern Oregon are approximately $210 per ton. Although recent sales data isn’t available for Montana, ample moisture should improve prospects for a large 2013 hay crop.
Fuel costs: The U.S. Energy Department reports average gasoline and diesel prices for June 10 at $3.65 and $3.84 per gallon, up 83 cents and 7 cents respectively from a year ago.
Interest rates: Short-term interest rates are stable, but long-term rates are rising. The 10-year Treasury bond rose approximately 58 basis points (0.58 percent) between March and mid-June.
Northwest land value trends: Northwest land values remain stable to increasing. Highcommodity prices and low interest rates continue to drive farms and ranches growth. Increasedcompetition for leases has also increased rental rates in select areas. Higher grazing rates may becapitalized into increased pasture land values. For more information on land values, visit www.northwestfcs.com/en/Resources/Land-Values.
Outlook
The fate of the U.S. corn crop is the primary variable impacting cattle markets for the next month and a half. A large corn crop will lower feed costs and support rising feeder cattle prices. However, price increases may be constrained by feedlot losses in the near-term. CattleFax recently lowered its 2013 average price forecast for 550-pound calves from $175 per cwt. to $165 per cwt. Prices at this level are profitable for most cow/calf and stocker operations, but too high for most feedlots to realize profits without higher fed cattle prices and/or lower feed costs.
Longer term, lower feed costs and tight supplies should support higher industry prices. Sustained price increases will be driven by demand and a domestic Gross Domestic Product (GDP) growing at 3 percent. Additionally, the cattle industry will need to address feedlots’ and packers’ over capacity. This may result in a slaughter plant closure and some feedlots idling over the next two years.
Learn More
For more information or to share your thoughts and opinions, please contact John Gates at 406-651-1700 or by email at [email protected].