Off the charts: Cattle market soars upward, no slowdown expected soon
July 11, 2014
"Everyone is asking how high it will go."
Scott Varilek, Kooima & Kaemingk Commodities, Inc., broker said his clients ask him on a daily basis if the feeder cattle market is still climbing.
Last June, fall feeder calf contracts (based on a 750 lb calf) were trading at $1.45 per pound, a record at the time, Varilek said. On June 25, 2014, the same contracts were valued at $2.14 per pound, or an approximately $520 jump per head in the value of the calf.
"My clients feel like they need to protect their investments. When you are going to buy a calf at $1,600, what if the market drops, you'll be broke," Varilek said.
"Unless there is an outside factor that affects the market, it could remain at these levels for at least a year or two," said the Sioux Center, Iowa, man who remains involved in Varilek Angus along with his dad and brother. Because the U.S. herd is in a "rebuilding" stage, producers are keeping back possible replacement females that would normally go to slaughter, Varilek said, so it will be one to two years at the earliest before cattle numbers increase significantly.
For about the last six months, live cattle (finished cattle) futures had been trading in the $1.40s per pound, which was a new record until now.
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Typically June is not a good month for fat cattle prices. But this year even the seasonal "glut" of cattle isn't pressuring the market downward.
"Normally, summer is when that market would drop. There are more numbers of cattle ready because producers in this region calve in the spring and all of those calves are fed over the winter and fat by the next summer. Even though there are more cattle available now than in the last few months, we are so tight on numbers, demand is sustaining the prices and pushing them even higher," Varilek said.
Varilek said live cattle contracts, a week ago, hit $1.50 per pound – previously unheard-of prices for finished cattle. "Today (June 24) they hit $152.65 (per hundred weight) on the front month. It's hard to say where they are going to stop."
Scott Vance with Faith Livestock Commission Co., Faith, S.D., said the fall-bred cows they sold June 23 brought prices comparable to the spring-bred cows, which is not the norm. Three to four year old bred cows were worth $2,300 – $2,375. He also mentioned the atypical market pattern this year, resulting in a continued upward trend through June when a drop is expected.
"The cattle are just not around," Vance said, saying market reports showed some nine-weight yearlings in the southeast selling on the cash market this last week for over $2 per pound.
Vance went on to say that one factor contributing to the upward trend in the market is the compounding issue of tight supplies. "All these feeders are staying current. They are getting bids and selling cattle when they are ready, they aren't over finishing them while they wait for a bid like they do when the market is softer." Less pounds per animal means less beef to sell, which helps push the price ever upward.
"The most important thing is, before you market those cattle, I'd get them in front of someone either on live acution or on a video sale to find out what their true value is," Vance said.
Are ranchers rolling in the dough? "The market is not out of line. We're handling more money but how much more we're getting to keep depends on the operation. We're talking flood, hail, lightening," Vance said, adding that many local producers suffered significant losses in the October blizzard, and are not able to take full advantage of the year's record prices. "When you think of the cows we lost that should have a calf beside them, even these prices are pretty low for some of those producers."
Vance went on to say that the industry as a whole has contracted, not only in cattle numbers but in the number of operators, and the remaining operators are aging. These statistics put a slight damper on the excitement of the strong market. "We've seen a few sons and daughters return to the ranch but it has been a struggle. Between winter storms, droughts and market challenges, it doesn't give anybody the ability to expand much." Many producers might not be stocked as heavily as they could be, due to labor shortages and tough markets in addition to weather problems, so they aren't able to take full advantage of the strong market, Vance said.
Vance said celebrating the record high market is bittersweet, knowing that it comes as the result of years of cattle liquidations nationwide. He recalls a comment he once heard, that hit close to home. "If ranchers and cowboys were oilmen, gas would still be a nickel a gallon," he said. "There is a lot of truth to that, we figure out a way to get more with less, its what we've done for years. Now we are down to less and less numbers, so a lot of ranchers aren't fully stocked and aren't able to take full advantage of this great market."
Simply put, strong demand and short supply is keeping the cattle market strong, said Rich Blair of Blair Brothers Angus.
Tri-State Livestock News market reports charting the past five years of slaughter steer prices literally display 2014 prices "off the charts" with the spikes driving though the chart titles. (See p. B10 for the current charts.)
"Obviously we are going to a new price plateau, which we did in 1979, and we did in 2003, and we did in 2008 before the stock market crash, but nobody knows what that price plateau could be," the Sturgis, S.D., commodities broker said.
"Six months ago everyone was saying 'we can't sell meat that high' and that's been proven wrong in a big hurry," he said. The industry likely won't know the answer to 'how high?' until next spring.
"This time of year is typically the seasonal low, so if this is the low, at around $1.43, and a typical rally is 20 percent, then $1.70 fed cattle are a definite possibility," Blair said.
The industry is maybe not quite in the expansion phase yet but it has stopped liquidating, he believes. "Texas and Oklahoma liquidated a million and a half head of cows due to the drought. That is as many cows as we have in South Dakota," he said.
"It would take something very drastic from outside to see a crash," Blair said. "The supplies are not going to change anytime soon. If anything, supplies will decline as we start holding back some heifers for breeding. And cow slaughter is going to decline from this level yet. So beef supplies are not going to increase anytime soon."
Ted Thompson with Thompson Livestock of Whitewood, S.D., said there are profits being made in the cattle feeding segment of the industry. "Feeders went from $150 to $300 (per head) losses to profits. A lot of cattle selling today are making $150 to $200 per head." The drop in feed prices is the biggest factor contributing to improved cattle feeding profit margins, Thompson said.
While the Thompson family owns cattle on feed in Nebraska and Kansas, and summers cattle in South Dakota, they are not currently placing new calves in the feedlot.
Thompson believes a market correction could be in the future.
"I think we're getting awful close to a top. I think people are banking on cheap corn but we've got to get the corn in the bin," he said. "And we've got feeder cattle that have to bring a dollar sixty (per pound) when they are finished. That's pretty big."
Ten dollars to $20 wouldn't be a big drop on the feeder side, Thompson said, and he wouldn't be surprised to see a dip like that this fall during the big cattle run.
"I've been thinking we could see a correction here anytime but I guess I keep getting proved wrong," he said.
"If you asked me 60 days ago if we could be at these price levels, I would have thought it was pretty tough," he admits. "It's pretty crazy. Yearling cattle are bringing all kinds of record highs."
Thompson, who also buys cattle for feeders across the country said the larger feedyards tell him they won't pay the prices that calves are currently fetching on video and internet sales. "It's not the big corporate feedyards buying them (calves contracted for fall delivery). It's the farmer feeders." Thompson said some of the smaller farmer feeders like to secure about half of their cattle early, on the video or internet, and then buy the balance of the cattle they need on the cash market in the fall. This method allows them to spread out their price risk.
Beef demand worldwide remains strong, Varilek said, and he is optimistic. "China is becoming a bigger and bigger player." China purchased 76 percent more beef in the first four months of 2014 than in the same time frame one year earlier. "They are now our third largest customer after Japan and Mexico," Varilek said.
"Since we've traded (contracts) at this high for six months on live cattle I think this is a sustainable price," he said.