Economic Analysis - February 2014 Livestock Market Update Brochure

1 Livestock Update: ______________________________ Cattle on Feed Surprises But Doesn’t Shake the Market Last Friday, USDA released the latest Cattle on Feed report. Headline numbers from the report are summarized below: Table 1. February Cattle on Feed Summary: Actual Figures vs. Pre-Report Estimates % of Previous Pre-Report Estimates* 1,000 head Year Average Range January Placements 2,029 108.6 102.8 95.7 – 107.1 January Marketings 1,788 94.5 95.2 93.2 – 98.0 February 1 On-Feed 10,760 97.2 96.0 94.8 – 99.0 *Source: Urner-Barry via Livestock Marketing Information Center. On its face, the COF report last week looked fairly bearish. Notably, placements were far above the pre-report consensus (to the extent that there was one). Marketings were well to the low side and the total on feed inventory figure was well to the high side of market expectations. Figure 1 plots the monthly on-feed inventory. Note in this figure that the increase in feedlot inventories from January to February is counter-seasonal. The move up was primarily driven by the surge in placements: that is, by larger inventories of “green” cattle. An estimate of the number of cattle with more than 120 days on feed can be calculated by taking the total February 2014 – Livestock Market Update Public Policy Department Budget & Economic Analysis Team In this edition: ? Livestock Update: John Anderson, Deputy Chief Economist Next Market Update: ? Crop Market Update: Week of March 10, 2014 Figure 1. Monthly Inventory of Cattle on Feed: 1,000+ Capacity Feedlots Data Source: USDA National Agricultural Statistics Service via Livestock Marketing Information Center 2 on-feed inventory and subtracting the previous four months of net placements. Figure 2 shows this calculated monthly number. These numbers suggest that front-end fed cattle supplies remain well below year-ago levels and have increased at less than a normal seasonal rate. Altogether, the negative-sounding headline figures in the report did not do much damage to the market. The high placements number did put some pressure on the nearby feeder cattle contract as well as summer fed cattle contracts. June Live Cattle futures, for example, were down on Monday, reflecting revised expectations about summer fed cattle availability in view of the January placements estimate. The two nearby contracts showed very little let-up, though, as front-end supplies of cattle seem to be quite manageable. The January placement figure is very likely a short-run phenomenon. In California, drought has forced calves into feedlots in larger-than-normal numbers. Placements into California feedlots in January were up by 27 percent over the prior year. Similarly, deteriorating wheat pasture conditions in parts of the Southern Plains also likely forced some calves into the feedlot earlier than planned. Higher January placements don’t change the fact that the number of cattle available outside of feedlots remains historically small. In fact, large January placements will further reduce that already tight supply, a fact that should show up in subsequent placement numbers in upcoming on-feed reports. Cattle Market Rebound A couple of weeks ago at AFBF’s Commodity Advisory Committee Meetings, I opined that the fed cattle market, which at that time was headed down after peaking at just under $150/cwt, may have already put in its high for the year. This week, that prediction is not looking too good. On Wednesday, USDA reported a few fed cattle sales in Nebraska at $152. We’ll see what the 5-Area price works out to on Monday when USDA summarizes all of this week’s business. We may not take out the 5-Area high, but based on at least a few individual sales this week, a new high looks to be within range. This week’s fed cattle rebound looks to be supported by higher wholesale beef prices. This week, the boxed beef cutout value has rallied pretty strongly. After falling below $210/cwt a couple of weeks ago, this week the Choice BBCV has moved back up to around $220/cwt. This is still well below the highs of around $240/cwt established a couple of weeks ago, but it has been enough to get buyers paying up for fed cattle again. Figure 2. Monthly Inventory of Cattle on Feed for >120 Days: 1,000+ Capacity Feedlots Data Source: USDA National Agricultural Statistics Service via Livestock Marketing Information Center 3 As interesting as the rally in boxed beef and fed cattle this week has been, it is still probably not as impressive as what has been happening in the cow/processing meat market. Figure 3 shows weekly average prices for 90 percent lean trim. Wholesale lean trim prices are up by over 17 percent compared with just the last week of December. Beef trim prices are very strong relative to other meat prices, particularly chicken. Using a weighted average of 90 percent and 50 percent lean beef trim prices, we can calculate the wholesale price of 78 percent lean ground beef – roughly the blend typical in fast food burgers. Last week, the 78 percent lean ground beef wholesale price was 60 percent higher than the wholesale price of boneless/skinless (b/s) chicken breasts. It has typically been only about 20 percent higher, so the current spread between the two is abnormally large. Reduced cow slaughter is undoubtedly playing an important role in supporting beef trim prices. So far this year, total cow slaughter is down by almost 7 percent compared with the prior year. Given this situation, it is not surprising that cull cow prices are soaring. Figure 4 shows the weekly average price on cull cows (boning, 80%-85% lean) at Kentucky auctions. The rise in lean trim prices has been paralleled by a rise in cull cow prices. With reduced cow slaughter as producers cull less aggressively, reduced lean trim supplies are supporting a very strong market. If forage and feed conditions remain amenable to herd expansion, cull cow prices should remain well supported throughout the year. Hog Market Improves Hog and pork prices have also put together a respectable rally over the last couple of weeks, both drawing support from and reinforcing the price strength in the beef market. The wholesale pork cutout Figure 3. Weekly Average Wholesale Price: 90 Percent Lean Beef Trim Data Source: USDA Agricultural Marketing Service via Livestock Marketing Information Center Figure 4. Weekly Average Cull Cow Price at Kentucky Livestock Auctions: Boning, 80%-85% Lean Data Source: USDA Agricultural Marketing Service via Livestock Marketing Information Center 4 has gained a little better than $10/cwt so far over the course of February. Market hog prices have posted similar gains. Unfortunately, at least some of the support for hog prices seems to stem from concern over the supply impacts of Porcine Epidemic Diarrhea Virus (PEDv). The incidence of PEDv has been steadily increasing around the country – and now into Canada. While producers appear to have done a generally good job in managing the effects of PEDv, any reduction in aggregate supply attributable to the disease will only serve to reinforce what is already expected to be a tight meat supply situation. With this backdrop in place, expectations for mid-year hog prices have really taken off in the last few days. This week’s CME Lean Hog futures prices suggest a summer high of around $109/cwt (dressed). By way of comparison, barrow and gilt prices (producer-sold hogs) touched the $100/cwt mark last year on one day (July 5). The highest weekly average price was $99.22/cwt for the third week of June. While pork prices have increased, so has the amount of pork in cold storage. Friday’s Cold Storage report showed that pork stocks in cold storage at the end of January increased 13 percent over the prior month and 3 percent over the prior year. Much of the year-over-year increase was attributable to bellies, which were up 237 percent compared to a year ago. The increase in stocks likely reflects an effort to offset expected smaller available supplies later this year rather than any slowdown in pork movement.