Cattle producers enjoyed a bullish market in the first half of 2004 that has shown no recent sign of softening. But, University of Kentucky agricultural economists urge producers to weigh the benefits and risks when making fall marketing decisions.
"Feedlot profitability will be a crucial factor driving marketing decisions in the second half of 2004," says Lee Meyer, University of Kentucky (UK) Extension agricultural economist. "Prices remain at astronomical levels, surpassing even the most optimistic projections made in the first quarter."
Currently, live cattle are trading at around $87 per hundredweight (cwt.). Quality seven-weight feeder steers are averaging over $100 per cwt. in Kentucky and are considerably higher in some locations, adds Kenny Burdine, UK Extension associate for livestock marketing. He says calf prices also remain high.
The economists say tight supplies and high consumer demand are driving prices and seem to be outweighing potentially volatile grain prices and reasonable uncertainty about the opening of the Canadian border to trade.
"Feeder cattle futures prices have shown a steady uptrend since April," Meyer says. "Backgrounders who worried about the profitability to summer grazing programs are now being offered attractive forward pricing opportunities."
For all of 2003, feedlot closeouts (profit/loss status) were in the black, reaching an all-time high in October. After the BSE discovery just before Christmas, feedlot closeouts moved into the red in January 2004 for the first time in 13 months. Many analysts predicted that closeouts would remain in the red for a long time but, according to the Livestock Marketing Information Center, recent strength in the fed cattle market sent May 2004 closeouts above $50 per head.
"If fed cattle prices can remain in the upper $80s, feedlots will likely remain profitable as we move into mid-summer," Burdine says.
A profitable May seemed to add strength to the bullish feeder cattle trend. Feeder cattle prices in the Midwest have run in the $105 to $115 per cwt. range for the past few weeks. Meyer says many people are starting to wonder if the feeder prices are justified.
"It's not clear that feedlots will remain profitable into the fall based on prices they are currently paying for feeders," he adds. "Consider the following: a 750-pound steer placed on feed in early June represented a cost to the feedlot of about $800. Based on an expected cost-per-pound-of-grain around $0.60, breakevens on these calves will likely be in the low-nineties when they reach the market this fall." As of July 6, October live cattle futures were trading just above $86.
"Clearly traders are being more optimistic than the futures market as they bid on feeder cattle," Meyer says. "They continue to bid more than $5 per cwt. above futures-based breakevens. If futures-based price predictions for fall are accurate, feedlots will likely lose more than $50 per head. Of course, this was also the case in early 2004 and feedlot operators have turned out to be correct as evidenced by May closeout numbers."
Meyer and Burdine say if there was one factor by which to characterize the market, it would be uncertainty. Since April, December corn futures have traded in a range from $2.80 to $3.40 per bushel. Boxed beef prices have fluctuated by as much as $12 per cwt. on a week-to-week basis. And, Meyer says the industry has been on a rollercoaster ride with respect to the opening of the Canadian border to live cattle and the Japanese export market.
Current slaughter weights and the recent narrowing of choice/select price spread may suggest that feedlots are not as current as they once were, Burdine says. "These factors are likely to set the tone for the cattle market in the second half of 2004. It should make for a very interesting fall cattle market."
Regardless, Meyer believes that current feeder cattle prices are based on a very optimistic view of the fall market, which most likely includes regaining the Japanese export market, strong boxed beef prices, stable grain prices and only moderate increases in slaughter weights.
"While some potential market upside does exist, considerable downside market risk is also present," Meyer says. "Producers planning to market cattle in the fall may want to consider forward pricing opportunities that currently exist as a way to lower the risk. The best marketers aren't the ones who always sell at the best possible time; they are often the ones who try to always sell at a good time."