Cattle Market Notes Week Ending March 24, 2017

Cattle Quick Thoughts

The ongoing scandal in the Brazilian meatpacking industry is impacting the flow of beef around the world. Some meatpacking companies in Brazil are under investigation for allegedly bribing food sanitation inspectors according to a recent report by the Wall Street Journal. This is a big deal because Brazil is the world’s largest exporter of beef. China and other key countries have suspended or reduced the amount of beef imported from Brazil as the investigation unfolds. While the U.S. cannot export directly to China, China will likely be forced increase imports from Australia, Argentina, and Canada until the situation in Brazil clears. The U.S. likely indirectly benefits for this as some of our trading partners also import from these countries. Increased competition will likely lead these trading partners to turn to more U.S. beef. It remains unclear how long this will last as China could resume trade with Brazil at any time and the indirect benefits to the U.S. could be short-lived. How this unfolds could have significant impacts on U.S. beef exports. The U.S. imports very little beef from Brazil and the USDA Food Safety Inspection Service (FSIS) has reported that “none of the slaughter or processing facilities implicated in the Brazilian scandal have shipped meat products to the United States.” FSIS has also instituted a 100% re-inspection rule on all beef from Brazil.

Cash Cattle:

Cash traded fed cattle were up slightly to an average of $128.95 for live sales, 20 cents higher than last week. Dressed steers were up $4.94 to an average of $212.97. Fed cattle trade volume was little over 26,000 head.

Mississippi feeder steers weighing 450-500 pounds were $4 lower this week to $153.50 while 750-800 pound steers were up $6 to $122.50. Average feeder prices in Oklahoma City for 500-550 pound steers were up $13.06 to $165.74 while OKC 750-800 pound steers were up $3.16 over last week to $133.11.

[ … For more in depth Livestock Prices and Production data and trends CLICK HERE … ]

Futures:

Cattle futures prices surged the week. April live cattle were up $3.08 over last week to $122.08 while June live cattle were up $3.35 to $112.73. March feeder cattle were up $2.30 to $133.50 while April feeder futures increased $4 on the week to $135.50. Corn futures prices were down this week with May and July futures each down 12 cents to $3.55 and $3.63, respectively.

Beef:                                                                                          

Wholesale boxed beef prices were up again this week. Choice boxes averaged $223.12, up $1.56 from a week ago. Select boxes ended the week at an average of $215.30, an increase of $1.76 from last week. The choice-select spread decreased slightly to $8.02, down 20 cents from last week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel unless stated otherwise.

The Four Percent Rule of Crop Insurance

With a looming farm bill debate, crop insurance stands as the largest single component of the crop farm safety net.  The program provides risk protection from low yield or revenue in return for a premium that producers pay.  These premiums were subsidized by the USDA on average about 63% across all programs in 2016.  The total cost of the subsidy in 2016 was approximately $5.85 Billion.  Figure 1 provides a bit of historical perspective on acres insured and total crop insurance subsidy.  Beginning in the early 1990s a series of legislative changes increased subsidy levels and acreage insured has trended up as well.  We note that recent declines in subsidy primarily result from reduced crop value as prices decline from historic highs.

Figure 1

In the next farm bill debate the amount of subsidy for crop insurance is likely to be a topic of discussion.  A frequent question posed to economist sounds something like this, “If we change the subsidy structure what will happen to crop insurance participation.”  This question has been asked and answered numerous times.  In most, but not all studies, the conclusion has been that crop insurance demand is inelastic.  That is, the percent change in participation will be less than a percentage change in subsidy.  However, many of those studies are older and may reflect a different era of crop insurance.

In this report, we examine some key data associated with RMA corn and soybean program participation.  We do not estimate an elasticity, but rather show evidence of a consistent pattern in in how much farmers are willing to pay for crop insurance.  We use the dramatic changes in crop value between 2011 and 2016 and variation in riskiness across regions to show a remarkable constant in crop insurance demand.  We find that across periods of high and low crop value and across regions of low and high risk – corn and soybean farmers are willing to pay out-of-pocket no more than four percent of the expected value of the crop.  If this is true, it has implications for the demand for crop insurance when subsidy is changed.  We do not provide a theoretical explanation for this finding but believe it may be tied to the degree of risk aversion and farmer budget constraints.

We begin by examining variation across region in the base county premium rate.  The maps in figure 2 and 3 show wide variation the level of yield risk across growing regions.  While most producers purchase revenue insurance, regional variation in premium rates are largely driven by yield risk.

Figure 2

Figure 3

Next we examine the amount of insurance chosen by corn and soybean producers.  Figures 4 and 5 reflect the acre-weighted average coverage level chosen in each county.  We use coverage level to represent the amount of insurance chosen by those who participate in the program.  When figures 4 and 5 are compared to figures 2 and 3, a pattern begins to emerge. Areas of the country with lower per-acre base premium rates also tend to purchase higher coverage levels than areas with higher base premium rates.

Figure 4

Figure 5

Figures 6 and 7 show the 2016 average producer paid premium per acre for corn and soybeans by county.  Note that producer premium is a function of the coverage level, rate, and value of the crops.  In general, low risk-high yield regions pay similar premiums per acre as higher risk-lower yielding regions.  Having said that the lower coverage levels chosen in many higher risk regions results in lower producer paid premium per acre.  Finally, the maps show that producer paid premium for soybeans are generally lower than for corn.  This is in part due to lower per acre expected crop value.

Figure 6

Figure 7

Figures 8 and 9 divides the average producer paid premium by the insured value of the crop to compute the percentage of expected crop value farmers opt to pay in producer paid premium.  This reveals our primary finding.  As can be seen in both figures, the majority of counties are shown to pay between one and four percent of the value the crop in 2016.  Thus, we find that farmers appear to be willing to pay a premium of about four percent of crop value and no more.

Figure 8

Figure 9

To test the robustness of our results in 2016 we also conduct the same analysis using data from 2011.  These results are shown in figures 10 and 11. Note that higher crop price in 2011 resulted in expected crop revenue more than 30% higher in that year than in 2016.  However the premium paid as a percent of crop value maps look quite similar to that of 2016.

Conclusions

While we find quite robust results, it is not clear why producers seem to spend such a constant percent of crop value on crop insurance.  Most likely it is related to the out of pocket cost associated with this program and the perceived benefits. We suggest that models of insurance demand consider the possibility of a budget constraint on crop insurance demand.  Ultimately, the consistency of these results suggests that if crop insurance costs rose past four percent of expected crop value, the producers would reduce insurance expenditure – most likely by reducing coverage levels.

Figure 10

Figure 11

Cattle Market Notes Week Ending March 17, 2017

Cattle Quick Thoughts

This week marked the fourth consecutive weekly increase in choice wholesale boxed beef prices. In total, choice boxed beef averaged $32.63 higher in the week ending March 17th than in the week of February 17th. The fact that boxed beef prices have increased is not necessarily surprising – prices followed a similar trend during this time last year (click HERE to see this in a chart). However, what is different this year is the magnitude of the rally and that it has occurred with larger beef production. The four consecutive weekly price increases from February 19th to March 18th in 2016 saw the average choice boxed beef price go up a total of $17.93. Also, average weekly beef production is 33 million pounds (7 percent) higher over the past four weeks of 2017 as compared to the same weeks in 2016. These are good signs for the current state of beef demand and welcome news for cattle prices.

Cash Cattle:

Cash traded fed cattle were up $3.50 to an average of $128.75 for live sales while dressed steers were up $6.46 to an average of $208.03. Fed cattle trade volume was about the same as last week at just under 105,000 head.

Mississippi feeder steers weighing 450-500 pounds were up $3.50 to $157.50 while 750-800 pound steers were down $4.50 to $116.50. Average feeder prices in Oklahoma City for 500-550 pound steers were down $5.16 to $152.68 while OKC 750-800 pound steers were up $1.89 over last week to $129.95.

[ … For more in depth Livestock Prices and Production data and trends CLICK HERE … ]

Futures:

Futures prices again finished the week higher across the board. April live cattle were up $1.45 over last week to $119 while June live cattle were up $1.78 to $109.38. Feeder cattle futures showed even more impressive gains. March feeder cattle were up $3.65 from last Friday to $131.20 while April feeder futures increased $4.70 on the week to $131.50. Corn futures prices were up slightly this week with May and July futures each up 3 cents to $3.67 and $3.75, respectively.

Beef:                                                                                          

Wholesale boxed beef prices continued to rally this week. Choice boxes averaged $221.56, up $7.44 from a week ago. Select boxes ended the week at an average of $213.54, an increase of $6.28 from last week. The choice-select spread increased to $8.02, up $1.16 over last week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel unless stated otherwise.

Cattle Market Notes Week Ending March 10, 2017

Cattle Quick Thoughts

Demand for beef in export markets started 2017 strong according to the most recent report. USDA ERS released the livestock trade data totals for January 2017 on March 9th. Exports in the month of January 2017 were 21 percent higher than in January 2016, an increase of over 36 million pounds. While there are many reasons why exports have increased, the price of beef is an important factor in the quantity of beef demanded in the export market. The average select boxed beef price was $217.52 for January 2016 compared to $189.54 for January 2017. Consumers generally demand more beef when prices are lower. On the import side, beef imports in January 2017 were 20 percent lower than in January 2016 – down almost 59 million pounds.

Cash Cattle:

Cash cattle showed gains in most markets. Cash traded fed cattle were higher again this week –  up 42 cents to an average of $125.25 for live sales while dressed steers were up $1.58 to an average of $201.57. Fed cattle trade volume was just over 103,000 head.

Mississippi feeder steers weighing 450-500 pounds were up $3 to $154 while 750-800 pound steers were up a buck to $121. Feeder prices in Oklahoma City for 500-550 pound steers were up $1.21 to $157.84 while OKC 750-800 pound steers were up $2.43 from last week to $128.06.

[ … For more in depth Livestock Prices and Production data and trends CLICK HERE … ]

Futures:

Futures prices finished the week higher across the board. April live cattle were up $1.52 over last week to $117.55 while June live cattle were up 82 cents to $107.60. March feeder cattle were up $3.58 from last Friday to $127.55 while April feeder futures increased $3.95 on the week to $126.80. Corn futures prices dropped this week with March and May futures each down 16 cents to $3.58 and $3.64, respectively.

Beef:                                                                                          

Wholesale boxed beef prices continued to strengthen this week. Choice boxes averaged $214.12, up $8.26 from a week ago. Select boxes ended the week at an average of $207.26, an increase of $5.45 from last week. The choice-select spread increased to $6.86, up $2.81 from last week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel unless stated otherwise.

Where have the Generic Acres Gone? Where will they go?

As the cotton industry asks for a new Title I program in the next Farm Bill, the question of what becomes of generic base becomes a central issue.  In this report, we summarize a USDA/FSA report summarizing the program crops to which generic base has been applied in 2015.  Note that an acre of generic base applied to a program crop then receives the payments associated with that crop.  Nationally 10.6 million acres of generic base were applied to program crops in 2015.  Of that total 33% were applied to soybean acres.  However, the Mid-south pulled up the national average where over 60% of generic acres were applied to soybean acres.

2015 Crops Planted on Generic Acres Percent of Planted Generic Acres
Total Acres WHEAT RICE-LONG GRAIN CORN GRAIN SORGHUM PEANUTS SOYBEANS
Grand Total 10,675,012 22.9% 0.2% 19.0% 14.0% 8.7% 33.2%
TEXAS 3,281,424 39.2% 0.0% 18.4% 34.9% 3.7% 0.7%
MISSISSIPPI 1,316,641 3.9% 0.3% 21.1% 3.6% 2.0% 68.9%
ARKANSAS 1,020,523 5.4% 1.3% 14.7% 10.0% 0.7% 67.7%
GEORGIA 871,613 7.3% . 16.5% 1.7% 59.0% 13.6%
LOUISIANA 830,276 4.8% 0.1% 30.3% 2.7% 0.0% 61.9%
NORTH CAROLINA 643,072 13.3% . 18.2% 1.7% 7.2% 58.9%
TENNESSEE 609,802 10.7% . 20.6% 7.8% 0.0% 60.8%
OKLAHOMA 455,071 89.8% . 1.5% 4.6% 0.6% 1.2%
ALABAMA 407,582 15.7% . 19.6% 1.8% 24.7% 36.5%
MISSOURI 351,708 8.0% 0.6% 16.2% 7.1% 0.3% 67.7%
CALIFORNIA 276,897 51.9% . 27.8% 8.4% . .
SOUTH CAROLINA 251,367 11.2% . 29.9% 1.9% 19.3% 36.8%[1]

 

In Texas, the state with the most generic acres, wheat and grain sorghum captured the highest percentage of generic acres.  Nationally wheat was the second highest percentage of generic acres pulled up by states like Oklahoma and California where almost 90% and 52% of generic acres went to wheat, respectively.

Many have suggested generic base was moving to peanuts.  Nationally, only 8.7% of generic base has moved to peanuts.  However, that shift is more common in Southeastern states where peanuts are a larger player such as Alabama, South Carolina and especially Georgia where 59% on generic base went to cotton.

Final thoughts

  • With projected declines in soybean and corn ARC payments in the future, perhaps these crops will become less attractive for generic base planting.
  • With the cotton industry push for a cottonseed program, what will become of the generic base is a key question for the farm bill.
  • Generic base was born of the ‘planted acre versus base acre’ debate during the last farm bill and will be integral to that conversation again.

[1] Source: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/arc-plc/pdf/2015%20and%202014%20Crops%20Planted%20on%20Generic%20Base%20Acres%20%20Oct%2024%202016.pdf

Cattle Market Notes Week Ending March 3, 2017

Cattle Quick Thoughts

The past two weeks have seen sizable increases in boxed beef prices. Average choice box price is up nearly $17 over the week ending February 17th. Likewise, we have seen increases in fed cattle cash prices. Live steers are up about $6 while dressed steers are up $12 over the past two weeks. Both of these indicate that finished cattle might be a little hard to find right now. However, live cattle futures prices suggest these prices are unlikely to maintain into the Spring and Summer months. The June Live Cattle contract is currently $10 lower than the April contract. There has been a pretty significant divide between these two contracts for the past few months (average of $9.83 since January 1). Much of this has to do with the expectation of more slaughter-ready cattle to be marketed in early Spring and lasting throughout the summer. Higher placements into feedlots beginning in November 2016 suggest that there will be a larger number of finished cattle over the next few months which is likely to lead to lower live cattle prices.

Cash Cattle:

Cash traded fed cattle continued to climb this week –  up 45 cents to an average of $124.83 for live sales while dressed steers were up $4.07 to an average of $199.99 this week. Trade volume was just over 134,000 head, up from 119,000 head last week.

Mississippi feeder steers weighing 450-500 pounds were up $7.50 to $151 while 750-800 pound steers were up $1.50 to $120. Feeder prices in Oklahoma City for 500-550 pound steers were down $4.07 to $156.63 while OKC 750-800 pound steers dropped $3.32 from last week to $125.63.

[ … For more in depth Livestock Prices and Production data and trends CLICK HERE …]

Futures:

Futures prices finished the week higher across the board. April live cattle were up 93 cents over last week to $116.03 while June live cattle were up $1.83 cents to $106.78. March feeder cattle were up $1.82 from last Friday at $123.98 while April futures increased 90 cents on the week at $122.85. Corn futures prices were up this week with March futures up a dime at $3.74 and May futures up 9 cents at $3.80.

Beef:                                                                                          

Wholesale boxed beef prices were up significantly this week with Choice boxes averaging $205.86, up $11.38 from a week ago. Select boxes ended the week with an average of $201.81, an increase of $9.94 from last week. The choice-select spread increased by $1.44 to $4.05.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel unless stated otherwise.

February Cattle on Feed Report Recap

The United States Department of Agriculture’s National Agricultural Statistics Service (USDA, NASS) released their monthly Cattle on Feed report on Friday, February 24, 2017. The report was in line with pre-report expectations for placements and marketings. The total number of cattle on feed was 10.78 million head on February 1, 2017. This was up 0.7 percent over a year ago and consistent with pre-report estimates.

Placements into feedlots in January of 2017 were 11 percent higher than placements in January 2016. Marketings totaled 1.75 million head which was up 10 percent over 2016. There was one more working day in January 2017 than in January 2016 which can account for a portion of the increase in marketings. Overall, the report can be considered mostly neutral as there were no major surprises.

This report was the first to include the larger weight groups that have been added to the monthly report. Placement weights over the last few years have been larger and the new groups will allow us to see how many very heavy cattle are placed. The largest weight group on previous reports (800+ pounds) has been split into 800-899, 900-999, and 1,000+ pounds groups for the U.S. numbers. For the 900-999 pounds group, 116,000 head were placed on feed in January 2017 while 45,000 cattle in the 1,000+ pounds group were placed. The addition of these larger weight groups will allow for a better estimate of when and how many cattle will be ready for market in the future.