The contra-seasonal price rally enjoyed by those selling calves and feeder cattle in recent weeks finally spread to fed cattle.
“Commercial cattle feeders are finally seeing profits on many of their finished closeouts as the fed cattle market has shattered its previous all-time record high of early May by trading at $131-$134 (live basis this week) and mostly $208 on a dressed basis,” explained analysts with the Agricultural Marketing Service.
Cash markets were buoyed by the recent surge in wholesale beef values.
Nearby Live Cattle futures reflect the current cash optimism, while deferred contracts seem to reflect concerns about whether or not consumers will continue to pay higher retail prices.
On both counts, slipping carcass weights are removing tonnage from a market already dealing with fewer cattle numbers.
“As many expected, average steer carcass weights started to decline the first part of September,” analysts with the Texas Cattle Feeders Association explained Friday. “The first 36 weeks of the year, the average steer carcass weight was nearly 8 lbs. above the previous year and nearly 22 lbs. above the five-year average. The last four weeks, the average steer carcass weight is nearly 5 lbs. below a year ago and just below 7 lbs. heavier than the five-year average.”
“Lower priced feed and the expectations for increasing finished cattle prices over the next four to five months should also encourage feedlot managers to feed to heavier weights,” says Chris Hurt, agricultural economist at Purdue University. “Low cattle numbers mean feedlots and packing facilities have a lot of unused capacity. Capacity is a fixed cost that doesn't go away with limited cattle supplies.”
Tom Brink, a private analyst who recently served as senior vice president and chief risk officer for JBS-Five Rivers Cattle Company, provided some perspective on cattle feeding capacity during this week’s Holt Cat Symposium on Excellence in Ranch Management, presented each year by the King Ranch Institute for Ranch Management.
In 2000-2001, Brink says cattle feeding capacity was in balance with the available supply of feeder cattle. By 2008-2009, there was excess capacity of about 20% as cattle numbers began to decline and capacity was added. Last year, he pegs excess capacity at 22%.
Now, consider that there are 2,100 feedlots with a capacity of 1,000 head or more—representing 90% of all the cattle fed each year, Brink says. These feedlots marketed an average of 10,521 head last year.
“It would take the equivalent of 600 of these feedlots to exit the business in order to bring capacity back into balance with the supply,” Brink explained.
“The combination of excess capacity and high fixed costs means that both (packers and feedlots) will tend to bid strongly for the limited cattle numbers," Hurt says. “…Unfortunately, these conditions also mean that the margins for both packers and feedlots, while better than in the past year, will still be narrow and likely less than their total costs.”
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Strong cattle prices and aggressive bidding by feedlots and packers are likely to lead to a year or more of additional herd downsizing, Hurt believes.
If the cow herd begins to expand in 2014, Hurt thinks downsizing cattle feeding capacity might end in 2015; packing capacity by 2016.
“The years beyond 2016 should provide some expansion for the beef cattle industry, but still a slow upward growth,” Hurt says. “A slow upward trend is not highly optimistic, but much better than declining trends of recent years.”
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