Feeder price performance this Fall has not followed the seasonally expected trend of lower prices from August to October. Cattle prices generally follow seasonal patterns due to when calves are weaned and sold, when grazing pastures are available, seasonal beef demand, etc. Past performance of prices during this period suggests that prices for 500-600 lb. steers would decline about 7.5% on average from August to October. This year, however, prices were about 2% higher in October than in August. This suggests that prices are about $13 higher per hundred pounds than we would’ve expected if normal seasonal patterns held.
The seasonal price index was constructed using data from 2011 to 2017. It represents how much monthly average prices differ from annual average prices. This is calculated by dividing each month’s average price by the average annual price. Next, the monthly average across the years of data is calculated to obtain an average price index. The price index calculated in this article has a base value of 1. This implies that if a given months price index is 1, the average price in that month is equal to the average annual price. If a monthly index value is 1.05, then the average price in that month is five percent higher than the annual average.
The fact that prices are outperforming seasonal norms during a time of increasing supplies begs the question of whether the normal price patterns will hold in the coming months. For instance, October is usually the time of the lowest within-year prices for 500-600 lb. steers in Mississippi. Did the low-point occur earlier this year? Or will it be later? I would lean toward the low-point having occurred earlier. Current Spring futures prices are allowing profitable stocking opportunities and fed cattle prices have improved to increase packer margins. Each of these points provide support for feeder prices as they suggest that potential buyers still see profitability, even if the prices are higher than the time of year might suggest.
The latest USDA Cattle on Feed report released Friday showed larger supplies of cattle placed into feedlots was expected prior to the report. The report showed a 13.5% increase in the number of cattle placed into feedlots during the month of September 2017 as compared to the September 2016. Average expectations prior to the report were that placements would be up 7.5%. The 13.5% increase totals a 255,000 head increase in the number of cattle placed in September 2017 over last year. This year’s placements were the largest for any September since 2011. Further comparing 2017 to last year, in total, 1.4 million more head of cattle have been placed into feedlots during the first 9 months of 2017 as compared to the same period in 2016.
While placements seem to capture most of the headlines, aggressive marketing rates continue to pull cattle through the system and keep slaughter weights down. In September, cattle marketed by feedlots were 2.9% above 2016’s. There was one less slaughter day this September than a year ago, so average daily marketings were 8.0% above 2016’s. Even though the head marketed has been well anticipated, its role in the market has been key to fed cattle prices, which recently have been more than $10 per cwt. above a year ago.
A critical result of the marketing pace has been year-on-year declines in slaughter steer and heifer dressed weights. The aggressive marketings since late 2016 have been pulling animals through the feeding stage of the production system, and that has driven weights below a year ago. For the five weeks prior to October 7th, steer carcass weights have been essentially flat and did not increase seasonally. This has major implications in that it suggests we do not have a swelling of market-ready supplies sitting in feedlots.
Beef exports continue to exceed 2016 levels as they have every month of 2017. The latest report shows August exports were 14.7 percent higher than the same period last year. This brings the January-August increase to 14.5 percent higher in 2017 than in 2016. The total amount of beef exported in August 2017 was the largest amount of any month since July 2013. Strong international demand for U.S. beef continues to be an important factor in the beef market.
Exports to the Japan were up almost 40 percent over August of last year. Also showing large increases were Vietnam (up 113 percent), Hong Kong (up 28 percent), and Canada (up 18 percent). Direct sales of beef to mainland China were 1.1 million pounds. This made it the 15th largest market for U.S. beef as the direct market there continues to evolve after the re-opening of trade.
Somewhat hidden under the discussion about the cattle on feed report last week was the release of the most recent report on beef in cold storage. The Cold Storage report indicated that frozen stocks were at 476.3 million pounds on August 31st. This represented a 10.3 percent increase in stocks as compared to July. On a percentage point basis, this was the largest increase for August stocks over July since 2002. It also followed moderate month-over-month increases for the previous three months. Cold storage inventories typically seasonally increase in the winter and then decline in the summer grilling-season months.
Cold Storage beef inventory is defined as frozen beef supplies maintained in commercial warehouses for over 30 days. It is reported for two categories: boneless beef and beef cuts. These inventories include a mix of boneless beef trimmings and muscle cuts along with bone-in beef cuts. Boneless beef represented about over 92 percent of the beef in cold storage in August. Each category showed a 10 percent or higher increase over July.
An overwhelming majority of the total beef produced in the U.S. never enters cold storage. However, cold storage behavior can be indicative of overall market conditions and is worth watching when beef production is increasing. Cold storage inventories are primarily driven by the ground beef market and international trade. Stocks may build up due to larger imports or to support larger exports as pointed out in the latest Livestock Monitor by the Livestock Marketing Information Center (available here).
While we have seen increases over the past few months, cold storage inventories have remained below 2016 levels on a monthly basis since February despite increases in beef production. Beef production in July was four percent higher than July 2016. The large increase from July to August still leaves inventories just below the August 2016 total (less than one percent lower). Granted, cold storage inventories were large in 2016. While beef in cold storage is only a small component of the total beef supply picture, year-over-year stocks are not increasing even with larger beef production.
This week’s article comes from a recent publication by Dr. Derrell Peel at Oklahoma State University. Mississippi prices follow similar patterns and considering price slides is a useful method of price analysis. Feeder cattle prices depend on the weight of the cattle with lightweight cattle typically having the highest price per pound (or hundredweight) and lower prices for heavier cattle. Not only do prices vary across cattle weights but the size of the price adjustment depends on the weight of the cattle. Price slides are a measure of the amount of price adjustment as weight changes from a base weight.
Feeder cattle prices depend on the weight of the cattle with lightweight cattle typically having the highest price per pound (or hundredweight) and lower prices for heavier cattle. Not only do prices vary across cattle weights but the size of the price adjustment depends on the weight of the cattle. Price slides are a measure of the amount of price adjustment as weight changes from a base weight.
Price slides have a number of uses, the most common of which is adjusting the price of forward contracted cattle if actual weight is different from the specified base weight. Price slides are also useful for producers to evaluate price changes for the weight gain of calves in a preconditioning or short backgrounding program or perhaps the additional weight from creep feeding calves. Prices slides are often stated in terms of traditional rules of thumb, e.g. a 10 cent slide on calves or a 6 cent slide on yearlings. The price volatility of recent years has shown that these rules of thumb using absolute levels are inadequate to accurately capture price adjustments over a wide range of price levels.
Price slides depend on the price level and thus are more accurately stated as a percent of the base price. Price slides are not only different for different weights but also vary for steers and heifers and at different times of the year. As an example of how to use price slides, suppose the base price of 575 pound steers is $150/cwt. The annual average price slide is 6.7 percent which results in a price adjustment of $10.05/cwt. If the steer actually weighs 30 pounds more or 605 pounds, the price would be adjusted down by $3.02/cwt ($10.05 x 0.3 cwt.) to $146.98 ($150-$3.02). In this example, the price slide is close to the traditional 10 cent slide. However, while the percent price slide is constant, the absolute price adjustment depends on price level. Thus, the 575 pound steer would have a price slide of $8.04/cwt. if market price was $1.20/cwt. or $12.06/cwt if the market price was $180/cwt.
The percent price slide for heifers is generally lower compared to steers for the lighter weights but is roughly equal to the steer price slide for heavy feeders. It is also apparent that price slides for both steers and heifers vary across months. Price adjustments can be fine-tuned using the monthly average price slides. In general, price slides are relatively constant across months for light weight calves and for the heavy feeders. Price slides in the middle feeder weights (575-725 pounds for steers, 550-700 pounds for heifers) have wide variation across months. For example, 675 pound steers have an annual average price slide of 4.0 percent which varies from 8.2 percent in March to essentially zero in October.
Price slides expressed in percentages adjust automatically and appropriately to changing market prices. Understanding price slides can help producers improve cattle marketing and evaluate feeder cattle production alternatives.