The market keeps on keeping on. Once again, the March cattle market seemed poised to take a step back, but managed to get some fuel to keep running. Just when it looked like the spring high was in, February’s rally found some renewed life in March.
Let’s go back and look at February. The front end of the month saw fed cattle trade being caught in sideways trade around $119-120 per cwt. But then packers began to chase cattle and the market found some new life. Fed sales ended the month at $124-5.
Similarly, March started out at mostly steady prices with the fed cattle market around $125. At least initially, it seemed the market might get caught there – meaning the 2017 spring high had been established. However, beef wholesale prices finally got some real traction and spurred another solid rally on the live side. Cattle feeders held strong for $128-129 in mid-March, and then bumped that another $3 to capture $131.The month ended a couple of bucks back at $127-128.
From a longer-run view, the four-week moving average now stands at $128; the best levels we’ve seen since last June. As noted in last month’s column, better prices on the live side would have to come through the cutout:
That said, the market’s recent strength has been fully supported on the back of better wholesale beef prices. The Choice cutout has been trending around the $120 mark – a substantial improvement given that the cutout hasn’t indexed over $200 since August (Figure 1). Stronger wholesale prices provided packers some room to compete for cattle in March.
Beef demand will be an especially important factor to monitor as we progress into summer. Bigger supplies (Figure 2) and seasonally softer demand can serve as a double-whammy for prices. However, if the economy is truly picking up and consumer sentiment remains solid, better beef demand could help offset some of that seasonal slump. Time will tell.
Nevertheless, it’s likely the spring highs really are in; the market will begin to battle bigger on-feed numbers and softening demand following preparation for Memorial Day featuring.
Moreover, the futures market could find itself under even greater pressure if the non-commercials begin to unravel their collective net long position (Figure 3). All in all, given those considerations, the Live Cattle futures market has provided some excellent price protection opportunities of late. And if those opportunities haven’t been exploited, now would be the time.
Backing up into the longer view around demand, much of beef’s pricing power in recent years has stemmed from the quality side. This week’s Industry At A Glance highlights recent quality grade achievements for the industry and the subsequent implications of that trend. In mid-March, the weekly quality grading percentages were 8% Prime and 74% Choice – 82% combined is a new all-time record for the beef industry.
What’s most important is the outcome; better carcasses mean better eating experiences and better sales. That’s the result of a long-run commitment to quality by the beef industry. And as noted in the column, “…that is beginning to pay real dividends for the industry. Undoubtedly, this has played an important role with respect to beef demand in recent years.”
The end of March also had the market absorbing several key grain reports. First, the Prospective Plantings report was in line with earlier estimates provided by USDA, albeit somewhat short of the general industry predictions before the report; corn acreage expectations, according to USDA, remain at 90 million acres in 2017. More surprising, soybean acreage estimate was revised upwards to 89.5 million acres – a new record.
Second, though, the end of March also has USDA releasing the quarterly Grain Stocks report. March 1 grain inventories were estimated at 8.62 billion bushels – 794 million bushels bigger than last year’s number.
Perhaps the bigger story comes from where those bushels are being held. The market has provided some excellent price protection opportunities of late. And if those opportunities haven’t been exploited, now would be the time.
Compared to the recent low in 2013, grain stocks have grown by 3.22 billion bushels – nearly 70% or 2.24 billion bushels of that increase has occurred due to on-farm storage (Figure 4). Widespread investment in on-farm storage is making a large difference – and will increasingly play an important role in market dynamics going forward.
In the meantime, it appears that farmers are relatively undersold. Don’t be surprised if basis behaves with lots of fits and spurts. Local basis will strengthen to induce sales off the farm. But once short-term needs are met, it will subsequently soften. That pattern may get repeated multiple times through the remainder of the marketing year.
The discussion around farm storage is an important indicator of how agriculture is changing. At times, the change seems incremental and difficult to assess. However, the grain stocks report provides solid indication that fundamental shifts have occurred – and continue to do so.
Bottom line: the business maintains lots of moving parts. With that in mind, it’s worthy of repeating every month: producers should ensure they have access to objective information that’s pertinent to their operations. That information should be filtered and reviewed with careful analysis thereby increasing the likelihood of utilizing it to make good business decisions going forward.
Nevil Speer is based in Bowling Green, Ky., and serves as vice president of U.S. operations for AgriClear, Inc. – a wholly-owned subsidiary of TMX Group Limited. The views and opinions of the author expressed herein do not necessarily state or reflect those of the TMX Group Limited and Natural Gas Exchange Inc.