The good news is June didn’t see any curves or sliders; the bad news is the fastball was electric. The market behaved largely as expected for this point in the year. That is, it followed the seasonal pattern for softer prices into June. Unfortunately, the break was especially big in the latter half of the month.
Recall that fed cattle traded in late May and early June with exceptional strength; in fact, feedyard managers were able to score higher prices with two straight weeks around $135-136 per cwt following Memorial Day. But then came the fastball; the market slid $6, then another $8-9 in early June and $3 more in the final three weeks of June (Figure 1).
In all, fed trade has retreated $25 in just eight weeks since the early May, spring high – about $17 of that occurring the last half of June. To put that in perspective, that’s equivalent to losing about $225 per head of value in just the past three weeks. To reiterate, the trend isn’t all that surprising; but the break has been especially painful. And it’s all because the fed market is being pressured on both sides.
First, wholesale beef prices have struggled to maintain their previous lofty values. Following the Memorial Day peak, the Choice cutout plunged $20 in June and finished the month indexing around $230. That slide explains much of the current pressure over on the live side.
However, even with the slip, it should be noted the cutout is trading $20 ahead of year-ago levels – and on substantially bigger volume versus 2016, a favorable indicator of underlying beef demand.
Second, there’s the whole issue of cattle supply. Stronger prices and favorable closeouts incentivized the cattle feeder to place cattle through the spring. And in aggregate, that influence is beginning to play out in the market. Cumulative feedyard placements through May total 825,000 head more than 2016 and 900,000 head bigger than the 5-year average. Those cattle are now being reckoned in the marketing mix (Figure 2).
Undoubtedly, the feeding sector has some inherent buffer because of active marketings through the spring; feedyards are largely current. However, the placement trend places added pressure on feedyard managers to keep the pipeline moving. That effectively begins to erode marketing leverage in weekly negotiations.
And because that trend has been enduring through the entire spring, marketing pressure will sustain through the summer and into early fall. The marketing rate will need to average about 165,000 head per month more than 2016 to work through all those cattle (Figure 3). As noted last month, “…feedyards are current and can afford some carryover. But those sorts of [placement] numbers, even in the face of seemingly positive demand, will require some real work through the summer.”
Last month’s column included some observations about the 2017 corn crop. Most notably, that mid-June serves as an inflection point relative to crop ratings and subsequent yield projections, based on some recent analysis by Irwin and Good – University of Illinois. At the end of June, the 2017 corn crop was rated as 67% good or excellent.
At first glance, that’s somewhat disappointing – and is being perceived by some as bullish for the market. That’s especially true considering last year’s mark at this point in the growing season was closer to 75% of the crop being rated good to excellent. However, based on the work by Irwin and Good, the current rating would place final yield right near trend-line projection – or about 167.5 bushels per acre. For more, see How big of a harvest?
Meanwhile, USDA’s most recent crop acreage estimate pegs corn at 90.9 million acres – about 900,000 acres bigger versus the agency’s initial acreage estimate. The yield estimate, along with revised acreage numbers, enables us to hone in on final production numbers.
Assuming trend-line yield of 167.5 bushels per acre and 90.9 million acres, 2017 total production should hover around 13.95 billion bushels (Figure 4). USDA is currently projecting 2017/18 marketing year usage at 14.3 billion bushels, and that will definitely change month to month going forward, depending on forecasts for ethanol and exports. In combination, one can begin to understand the surplus or shortfall that may develop to carryover going into the new marketing season.
In other words, in the big picture, we’re working toward a more defined window between use and expectations. And in accordance, the market will respond to news—but don’t expect huge moves in the next months to come—save any major negative developments around weather.
At the same, the USDA June 1 stocks report indicates that inventories are plentiful—especially when considering on-farm holdings (see this week’s Industry At A Glance). The biggest market moves will likely occur around local basis with on-farm bins being cleared to make room for the new crop.
In closing, producers should be encouraged by the general underpinning for the cattle market from a demand perspective. That’s been an enduring theme through much of 2017. Moreover, the feeding sector shouldn’t have to fight feed cost headwinds.
All of that should prove supportive for feeder cattle prices going into the fall. However, sellers need to remain guarded around several factors including:
- Marketing slowdowns through the summer,
- Excess enthusiasm about China’s beef potential, and
- ·Any further news regarding JBS.
All that said, the market’s general theme continues to be generally positive because of demand. However, volatility is also the rule – markets are reactive. With that in mind, producers need to stay very focused and intentional about their business.
The best approach in that environment is to ensure access to objective, insightful information and adopting the discipline to analyze and absorb that information. Investment of time and energy into that endeavor is highly valuable – it helps to ensure the likelihood of making sound and timely 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.