FED STEER PRICE FALLS BACK TO $63
Prepared by Hales Cattle Letter
Fed Prices Should Make Low For
The Year In Next Two Weeks!
Fear Is Making A Bottom In Prices
Fear of the massive formula and contract supply controlled by the packing industry has the cattle feeder willing to sell on Monday or Tuesday at almost any price that the packer will bid. Fear of that illusive wall of cattle, due to massive placements this winter and spring, is keeping the cattle feeder an aggressive seller. Fear of a seasonal decline in beef demand is keeping the cattle feeder from feeding cattle longer.
Facts Will Win Over Fear
Although placements have been higher each month for 10 out of the last 11 months, steer and heifer slaughter remains below year-ago levels. Steer carcass weights are staying well below last year's level.
Cow Slaughter Is Key
Since the week ending May 16, cow slaughter has averaged 25,800 head below last year. At an average carcass weight of 535 pounds, weekly cow beef production is down 13.8 million pounds from 1996.
The last actual USDA weekly slaughter data reported cow slaughter only 2,500 head above the 1091 through 1995 average. Significant cow liquidation is over until the late fall.
Beef Production Down
As a result of the decline in carcass weights and cow slaughter, beef production is below a year ago. Third-quarter beef production will also be below second quarter. As a result, fed prices should bottom in the next two weeks and rally through September when fed prices could be $70
Four States Versus All States
Marketings in the four major feeding states now account for about 80% of all cattle sold out of feedlots with a capacity of 1,000 head or more each month. This makes the four major feeding states the most important portion of the monthly Cattle on Feed report.
Since the bulk of the cattle fed in these four states are in sizeable commercial feed yards, they are more visible and easier to count than if they were found in small farmer-feeder lots. As a result, Cattle on Feed reports can be misleading if they are used to project actual steer and heifer slaughter. For instance, since October 1 of 1996 the seven states placed a total of 1,335,000 more head on feed than the prior year. Of this total, the four states accounted for all but 17,000 head of the increase. Although placements soared during these months, actual steer and heifer slaughter from January through the middle of June was down about 100,000 head from 1996.
Four States Up-All Others Down
The chart below shows the relationship between marketings out of the four states and all other states since December of last year. While the four states' marketings increased each month, the marketings out of all other states decreased except for last December. Marketings out of the four states increased 226,000 head while marketings out of all other states decreased 151,000 head.
During the month of May, the four-state marketings were up 65,000 head while the marketings out of all other states were down 19,000 head and steer and heifer slaughter was down 21,000 head rom 1996.
Commercial Concentration
Cattle feeding in the United States is becoming more concentrated each year in the commercial feedlots located in the four states of Texas, Kansas, Colorado, and Nebraska. As demonstrated above, the increase of cattle on feed in the four states is not necessarily indicative of an equal increase in the feedlot population of all other states. In fact, this year the increase in the four states occurred as feedlot numbers declined in the other states. Thus, the perceived increase in feedlot numbers is greater than reality because they are simply more visible in the four states.
Steer Weights Bottom Seasonally
Steer carcass weights bottomed during May just as they have in the past. As the industry enters summer, the weights are increasing as expected and should continue to increase through the fall. However, this year the steer carcass weights should increase at a faster rate than in prior years. By September or October, weights will probably be above last year and equal to the three-year average. One reason for this increase in weights is the premium of the deferred futures contracts as illustrated by the second contract basis chart. Premiums reflect a bullish attitude and attract cattle like honey attracts flies.
Another reason is the high breakeven price compared to the selling price of the fed animal. In order to lower the breakeven and buy time, cattle will be fed to heavier weights. This will push August cattle to September, September cattle to October, and October cattle to November.
The third reason for cattle to be fed longer and to heavier weights is the relatively high price of replacements. With feeder cattle costing up to $15 more than the selling price of a finished steer (which is losing money), cattle feeders will find it expedient to feed cattle for a longer time.
Basis Levels Near Normal
Basis levels this year have followed the seasonal patterns illustrated by the three- and five-year averages. Both the nearby and second contract basis charts clearly show this trend. Both charts also show that the premium of the futures to cash prices is at its widest point in late June or early July.
The weekly average nearby basis may widen slightly next week, but don't expect it to widen any further. It will probably stay about $1 over cash all the way through expiration. When October becomes the nearby contract, it will probably be at a larger premium to cash than the August is at this time but at a smaller premium than it is today.
Basis Trading Opportunity
In late October, another basis shift occurs. Cash prices once again goes to a premium. Fed steer prices reach about $1 over December and $2 over February by the middle of November.
Cattle feeders should consider placing hedges for October, November, and December cattle in the February contract. With the February contract currently more than $1 over December and almost $4 above October, there is an opportunity to increase the hedge margin by several dollars if the normal seasonal basis shift occurs this fall.
June 27, 1997 David Hales and Tom Horton
Hales Cattle Letter
P.O. Box 1623, Amarillo, Texas
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