Cattle Market Implodes, Challenges Ahead, Analysts Say
Why do people want to go into the store and buy a steak, when chicken and pork are much cheaper? That mentality is backing up the beef supply and is the exact reason, along with weaker exports, given for a plunging cattle market, according to market watchers.
Since the summer months, the U.S. cattle feeder futures market has fallen by 20% to 25%. Though input costs are the lowest they have been in years, domestic and international beef demand is not keeping up with the mountains of meat product, according to Craig Hays, The Linn Group’s Risk Manager Analyst.
“Producer margins are terrible,” Hays says. For a feedlot operator that does not have his/her herd hedged forward, or bought cattle when they were $190 to $200 per hundredweight, losses today are reaching $300 to $400 per head,” Hays says.
Less than half of all U.S. cattle operators use the futures market to hedge, according to Hays.
Ben DiCastanzo, senior technical analyst at Walsh Trading, Inc., says that the cattle market has been in a downtrend for a while and no relief is seen anytime soon.
"Feeder cattle prices reached their daily limit lows on Wednesday. We tried to rebound from dropping below a long-term trendline on price charts. Technically, it doesn’t look good for feeder cattle prices. If we could have stayed above the high from three weeks ago, things might be different. But, we couldn’t do that. We opened the week with a low of $160.50 per hundredweight and just have continued lower to $149.35,” DiCastanzo stated in a daily webinar Wednesday.
On Thursday, the CME Group's highly traded January feeder cattle contract closed up $1.77 per hundredweight to $152.40.
Glynn Tonsor, livestock economist for Kansas State University and K-State Research and Extension, said based on the most recent Focus on Feedlots survey, the industry looks to be particularly bleak over the next six months according to a university and Extension press release Thursday.
The estimated return in October for steers was nearly a $400 loss per head, the largest loss on record since January 2002. Currently, the net return projected for November closeouts for steers is a loss of $547 per head.
“For the balance of 2015, I am projecting more than $446 in losses per head,” Tonsor said. “It is important to recognize this is using a cash strategy, where you are paying cash for feeder cattle based on what the market was, paying the cash price for corn, and getting the market cash price.”
Tonsor stressed that if cattle feeders utilized price risk management strategies, this projection does not necessarily apply to their situation.
Packers See Green
On the flip side of the cattle production chain, the U.S. meatpackers are enjoying positive margins. “Hog packers are seeing $30- to $40-per-head positive margins, while cattle meatpackers are gaining $10-per-head margin. Slaughter numbers are running ahead of normal pace. Plus, the cold storage reports have been a stark reminder of how good packer margins have been for the last 6 months,” Hays says.
Projected Returns for 2016
In its December Supply/Demand Report Wednesday, the USDA estimates U.S. 2015 and 2016 beef production to drop 220 million pounds from its estimates in November. Less beef is a start for a price turnaround.
Tonsor projected the environment to be slightly better by June 2016, with a projected loss of $67 per head. He stressed that while there is a projected loss, the margin for error given variation across operations in cost of gain is easily a-$50-per-head movement either way, which makes the situation a potential breakeven for some operations.
While there isn’t much of a change in projection of fed cattle prices for 2016, the cost of feeder cattle at placement is projected to change substantially.
“For the November (2015) closeouts, I am assuming someone paid $219 for feeder cattle,” Tonsor said. “In the June 2016 closeouts, I am assuming they pay $150 for the animals replaced. I’m using June to make my point that we have the price of feeders down, corn prices haven’t changed much, so the cost of gain is such that we get closer to a break-even projection.”
It takes approximately six months to finish an animal, he said, so those involved in the cattle feeding industry can look ahead in this six-month cycle, based on projections, to plan and make buying and selling decisions.
While the immediate future for feedlots will be rough, Tonsor added that he holds hope for the second half of 2016. Beef demand, both domestic and international, could help the industry improve prices, perhaps not in the next month or two but further into 2016.
Crude Oil vs. Feeder Cattle
The crude oil market has been crashing to its 2009 lows at $33.50, just $4 off that, as of this week. When considering that fall, the feeder cattle market has a ways to go to match that kind of decline. In 2009, the feeder cattle market reached $90.17 per hundredweight, and $85.50 in 2008.
If we can settle the week above the long-term trend line with some short-covering, it would allow folks to put some hedging positions on. But if we don’t, we will have a lot more weakness to come, I believe,” DiCastanzo says.
DiCastanzo adds, “Technically, we have support levels at $141.80, but if we break through that level, then we will head toward the next support price of $130.00. If we fall below that, we could test the long-term support levels of $114.00 per hundredweight. So, there are a lot of problems in cattle.”
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