Better Than Expected Fall

By : Stephen R. Koontz, Department of Agricultural and Resource Economics, Colorado State University


Fed cattle, feeder cattle, and calf cash prices have all been stronger than expected through this fall. Live cattle and feeder cattle futures contract prices have also shaken off the pessimism of abundant supplies compounded by the unexpected closure of the Tyson beef plant in southwest Kansas. How did the market turn this corner?
There has been the standard discussion of timely marketing of fed cattle, slaughter weights being modestly behind last year’s, packer’s running substantial fed cattle slaughter on Saturdays, and other supply focused points. What is being discussed less in the strong retailer and, by definition, consumer effects? Packers margins have been very strong in August and September, and likely October, approaching $500 per head. These are the live-to-wholesale beef price spreads. This value is much higher than other months and much higher than prior year highs. This is, of course, due in part to the plant closure. But it is interesting that the Live-to-Retail price spread has moved little in these same two months. The live-to-retail spread is up only less than 2-3%. The retailer margin or the wholesale-to-retail spread has declined sharply. Again, the live-to-wholesale spread is up, the live-to-retail spread is even, so it is the retailer that has taken a chunk out of their margin.
Where did this go or what is the retailer paying more for? The boxed beef compositive value increased almost $30/cwt in a three-week period prior to Labor Day. The cut that was the biggest mover was loin price: increasing $200/cwt. The ribeye increased about $150/cwt and remains strong into the rib roast holiday season. Other primal cuts are both positive and negative, so it is the middle-meats and steak cuts that the retailer is driving. Finally, an interesting thing that has yet to be explained is the strength of the Choice-Select spread – the USDA Choice grade premium or the Select grade discount. The Choice-Select spread has normal seasonal strength in spring months and then as Choice supplies increase over summer then the premium normally fades. The Choice-Select spread has yet to show anything other than modest and temporary weakness this year. The spread is currently better than +$25/cwt and has been that way since June. A typical Choice-Select spread for this time of year is much closer to $10/cwt. Thus, it is clearly the retailer that has helped the cattle market turn the corner on any pessimism from summer supplies and slaughter disruption. And there does not appear to be any push-back from the consumer.
The Markets
What do the technicals say? Live cattle and feeder cattle futures have been in a very strong rally since the second week of September. The retailer provided the fundamental news justifying this move. Live cattle contracts are approaching resistant planes formed last April. This is across the board of nearby to deferred contracts. I anticipate the rally will stop there until there is a reason to move higher. This action would be a selling opportunity. Feeder cattle contracts are some distance from the highs of last spring so the technical signal is not as clear. It is reasonable for feeders to mirror live moves. Nonetheless, it is also reasonable to expect some correction or softening of prices into the holidays with the typical cattle and beef market doldrums of this time period.

Week of Week of Week of
Data Source: USDA-AMS Market News 11/1/19 10/25/19 11/2/18
5-Area Fed Steer all grades, live weight, $/cwt $113.03 $110.13 $114.95
all grades, dressed weight, $/cwt $179.39 $174.56 $180.27
Boxed Beef Choice Price, 600-900 lb., $/cwt $230.78 $223.08 $216.67
Choice-Select Spread, $/cwt $25.78 $25.00 $13.92
700-800 lb. Feeder Steer Montana 3-market, $/cwt $150.71 $156.12
Nebraska 7-market, $/cwt $159.98 $149.27 $157.90
Oklahoma 8-market, $/cwt $145.60 $147.35 $154.06
500-600 lb. Feeder Steer Montana 3-market, $/cwt $166.74
Nebraska 7-market, $/cwt $161.42 $160.34 $174.83
Oklahoma 8-market, $/cwt $151.81 $149.86 $163.88
Feed Grains Corn, Omaha, NE, $/bu (Thursday) $3.76 $3.76 $3.38
DDGS, Nebraska, $/ton $145.50 $147.50 $135.00
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