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LIVESTOCK MARKETS: Cattle finishing prospects much brighter

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With the exception of May 2016, Purdue University agricultural economist Michael Langemeier noted in “farmdoc daily” that monthly fed cattle net returns were negative from December 2014 through November 2016. However, he said prospects for 2017 appear much brighter.

Feeding cost of gain, which is important to cattle finishing net returns, averaged $85.16/cwt. in 2015 and $77.20/cwt. in 2016. In the first three months of 2017, Langemeier noted that feeding cost of gain ranged from $71.83 to $73.05/cwt. Given current corn and alfalfa price projections, feeding cost of gain is expected to range from $70 to $75 for the rest of 2017, he added.

The ratio of feeder to fed cattle prices from January 2007 through March 2017 (Figure 1) averaged 1.19. According to Langemeier, the feeder-to-fed price ratio was one standard deviation below (above) this average for 10 (20) months during this period. The average net return for the months in which the ratio was below one standard deviation of the average was $87 per head.

In contrast, Langemeier explained that the average loss for the months in which the ratio was above one standard deviation of the average was $251 per head. Of the 20 months with a ratio above one standard deviation of the average feeder-to-fed price ratio, 17 of these months have occurred since January 2015.

The good news, Langemeier said, is that in March 2017, the feeder-to-fed cattle ratio was below one standard deviation of the 1.19 average. Moreover, given current price projections, the feeder-to-fed price ratio is expected to remain at or below the 10-year average through August 2017, he added.

“For April, May, June and July, the feeder-to-fed price ratio is expected to remain below 1.10. These relatively low ratios, along with relatively low expected feeding cost of gain, translate into some excellent net return prospects for these months,” Langemeier said.

Of course, an unexpected drop in fed cattle prices would create a spike in the price ratio, dampening net return prospects, he said.

Explanation for lower prices

Before discussing monthly cattle finishing net returns, Langemeier briefly discussed why the feeder-to-fed cattle price is expected to be so low for March to July 2017. He explained that months in which the ratio is close to average translate into net returns that are around the breakeven level. Months in which the ratio is relatively low or relatively high translate into large losses or large positive net returns. In general, Langemeier said ratios that are relatively low or relatively high result from unexpected changes in fed cattle prices.

“Large negative shocks in fed cattle prices, as occurred from August to December 2015 and from August to October 2016, create spikes in the price ratio. Conversely, large positive shocks, such as those experienced in early 2011 and the first few months of 2017, create sharp declines in the price ratio,” he said.

Fed cattle prices improved from approximately $120/cwt. in January 2017 to approximately $130/cwt. in April 2017. At the same time, feeder cattle prices for January through April closeouts fell from $145/cwt. in January to $130 in April. The price changes resulted in a sharp decline in the feeder-to-fed cattle price ratio and a dramatic improvement in net return prospects, Langemeier explained.

Monthly steer finishing net returns from January 2007 to March 2017 computed using closeout months rather than placement months showed that average losses in 2016 were $126 per head and ranged from a loss $362 per head in January to a net return of $57 per head in May. Net returns per head for January, February and March 2017 were approximately $56, $149, and $308, respectively. Langemeier pointed out that the March figure represented the first time since November 2003 that the monthly net return has been above $300 per head.

Breakeven prices for April through August are expected to range from $106 to $110/cwt. For the last four months of the year, breakeven prices are expected to range from $113 to $116/cwt.

Langemeier said current fed cattle price projections suggest that the breakeven prices indicated above could result in strong net returns through August, with net returns being particularly strong through June (i.e., exceeding $150 per head). “At this time, at least modest net returns are expected for the last four months of 2017. However, if feeder cattle prices continue to strengthen, net return prospects for the last quarter of 2017 will weaken,” he said.

Langemeier concluded, “Current breakeven and fed cattle price projections create an environment that is optimistic through August and cautiously optimistic through the rest of 2017. After a disastrous 2015 and 2016, this is certainly welcome news.”

Market recap

The June live cattle futures market was lower to begin the week but recovered some of the losses as the week progressed. Nearby contracts closed lower Monday at $122.45/cwt. but finished Thursday higher at $122.925/cwt.

May feeder cattle futures followed the same trend. Nearby contracts closed lower Monday at $142.525/cwt. but closed higher Thursday at $142.275/cwt.

For the beef cutouts this week, Choice and Select closed lower at $247.21/cwt. and $221.66/cwt., respectively.

Lean hog futures continued a recent trend upward. May lean hog futures were mixed but climbed as the week progressed. Nearby contracts closed lower Monday at $77.25/cwt. but finished higher Thursday at $79.150/cwt., up from $71.525/cwt. the prior week.

Pork cutout values were mostly lower on Thursday. The wholesale pork cutout was lower at $87.00/ cwt. but up from $81.85/cwt. last week. Loins and hams were also lower at $86.16/cwt. and $66.42/cwt., respectively, while bellies were sharply higher at $138.07/cwt.

Hogs delivered to the western Corn Belt continued to climb this week, closing at $71.30/cwt. on Thursday.

The U.S. Department of Agriculture reported the Eastern Region whole broiler/fryer weighted average price at $1.019/lb. on May 12, up from 97.36 cents/lb. on May 7.

According to USDA, egg prices were steady, with a steady to firm undertone. Offerings were light to moderate. Demand was moderate, while supplies were light to mostly moderate.

Large eggs delivered to the Northeast were unchanged at 64-69 cents/doz. Prices in the Southeast and Midwest were also unchanged at 59-62 cents/doz. and 52-55 cents/doz., respectively. Large eggs delivered to California were unchanged at $1.10/doz.

For turkeys, USDA said the market was steady to barely steady. Offerings have been mixed but mostly moderate.  Prices for hens and toms were slightly lower at 93 cents to $1.03/lb.

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