Feeder numbers, corn prices drive cattle market
Because of drought conditions in many grazing areas, the number of U.S. cattle-on-feed is at a record high. So, why are cash cattle prices not going lower?
The quick and easy answer is just because there are a lot of cattle on feed doesn't mean a lot are being sold, Adam Frick, Allendale livestock analyst said. But, those cattle will eventually hit the market.
A similar question about fed cattle flooding the market was being asked last year, Frick said. "Last year, in January, there was an apparent 'wall' of cattle that was supposed to create a supply glut in August," Frick said. "We got to August and made cash cattle highs. So, everybody was asking where did that 'wall' of cattle go?"
Currently, as November approaches, the cattle industry is talking about another 'wall' of cattle.
USDA, in its October report, estimated 11.385 million head of cattle on feed, 260,000 head above the previous record in 2001.
"With the weight breakdowns and supply situation, we are looking at the February-April 2007 timeframe when a pretty good supply glut could be coming down the line," Frick said.
If everyone is thinking the same way, feeder operators normally would steer away from that glut timeframe. However, with corn prices going higher, the quicker the animal is fed out the lower the cost of production.
DEMAND KEY FOR 2007
Because there doesn't seem to be any easy way to avoid a huge beef supply between February-April of 20007, the industry is hoping for a big appetite coming from somewhere. Frick says the domestic demand is a concern. "We've had the seventh consecutive quarter of a decline in beef demand at the retail level," Frick said. "This tells you the demand structure is very weak."
Weak beef demand could lower fed-cattle prices in 2007, making producer profit margins tighter.
One demand wild card may be that consumers are spending less on gasoline and natural gasoline compared to a year ago.
"That has to continue to happen if we are going to keep cattle prices stable or above $0.90 per hundredweight throughout 2007," he said.
For 2007, Allendale Inc. has estimated an average annual fat cattle price of $0.86 per hundredweight, with summer lows below $0.80.
So far this fall, cattle prices have been trading steady between $0.87-$0.92 per hundred weight cash cattle.
FEEDER PRICES vs. CASH
Frick said if the producer can't make money off fed-cattle, buying cheaper feeder cattle is the next option. Last year, feeder cattle were as much as $23.00 per hundredweight higher than cash cattle.
"This year, Frick said, "With corn prices going higher, you could see a correction between those two classes of cattle. I think you'll see a difference of only $5.00-$10.00."
Frick added, "I've heard from a floor trader at the Chicago Mercantile Exchange, that feeder cattle would trade below fat cattle at some point."
EXPORTS SLOWED UNTIL 2010