Feeder and fed cattle prices move higher

Cattle markets this week suggest the worst of the price impacts from the Tyson fire in Kansas are in the rearview mirror.

Feeder cattle prices continued to bounce higher as futures prices rallied and buyer confidence improved with higher fed cattle prices.

Steers and heifers sold $4-$8 per cwt higher in the North Central and South Central regions, according to USDA’s Agricultural Marketing Service (AMS). Calves in the Southeast traded steady to $2 higher.

“Demand was much improved after the bullish Cattle on Feed report confirmed much lower feedyard placements, which is supportive for the coming months in the fed cattle market,” say AMS analysts. Those analysts note auction receipts for the week of 208,000 head were the most since April.

Week to week on Friday, Feeder Cattle futures closed an average of $5.13 higher. That makes for an average of $7.78 higher over the last two weeks.

“Yearling feeder cattle producers were feeling better about the market and willing to consign their cattle for sale,” say AMS analysts. “They’ve been able to hold their cattle on grass as grazing has been plentiful and a lack of a killing frost in northern areas have allowed yearlings to stay out on grass without losing pounds. Consignments of spring-born calves have not hit their stride yet. Demand has been moderate to good, especially for those calves on a vaccination program.”  

Demand for calves to graze winter wheat is likely adding support, although planting is delayed in some areas due to dryness. According to the most recent USDA Crop Progress report, 22% of winter wheat was planted (week ending Sept. 22), which was 4% less than the same time last year and 2% less than the five-year average.

“Some of the support in the feeder cattle market may be due to the thought that finished cattle prices have reached the bottom of the valley and will slowly strengthen over the next several months,” explains Andrew P. Griffith, agricultural economist at the University of Tennessee, in his weekly market comments. “Alternatively, it may be that cattle feeders simply believe finished cattle prices cannot possibly go any lower, which places a floor on where they anticipate prices to move.”

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Market reaction fits expectations

Plenty of folks—from cattle producers to their elected representatives—continue to question how markets reacted following the Tyson beef plant fire in August. In the meantime, several economists explain market reaction was in line with what they would expect from such a market shock.

“It should not be surprising that we had a large increase in cutout prices and a notable decline in fed cattle prices,” said Glynn Tonsor, agricultural economist at Kansas State University (KSU), at last week’s KSU Beef Stocker Field Day.

For fed cattle, Tonsor explains the loss of 5-6% of the nation’s fed cattle capacity decreased the derived demand for fed cattle, as packer costs increased to accommodate the supply disruption. At the other end, he says relatively low beef cold storage supplies ahead of the fire added to uncertainty for beef buyers.

“With fresh beef production suddenly decreased, boxed beef prices rose sharply to ration a suddenly limited supply,” explains Derrell Peel, Extension livestock marketing specialist at Oklahoma State University. “With less supply available, the market uses higher prices to determine how limited beef supplies will be allocated.”

That’s a common market reaction, he says. “When a freeze hits Florida, orange juice prices begin to rise immediately, not because there is an immediate shortage of juice but to make sure that the current supply continues to be available over time. Markets will never tell a consumer that they cannot have a product but prices will rise enough to convince some consumers not to consume as much of the product at this time.”

Likewise, Jayson Lusk distinguished professor and head of the department of agricultural economics at Purdue University, says the observed reduction in cattle prices and increase in wholesale beef prices were consistent with a model of competitive outcomes.

“An unexpected reduction in processing capacity reduces demand for cattle, thereby depressing cattle prices. The need to bring in additional labor to increase Saturday processing and temporarily repurposing cow plants for steers and heifers involves additional costs that pushed up the price of wholesale beef.

“These price dynamics are not surprising and are generally what would be expected from the fundamental workings of supply and demand,” Lusk explained in prepared testimony presented this week to the U.S. Senate Committee on Agriculture, Nutrition and Forestry.

Although prices are recovering from the market shock, Tonsor points out they were under pressure before the fire. That means there may not be much of a price bump when capacity returns—various reports suggest the Tyson facility will be up and running by the beginning of next year.

“Re-opening the plant will enable the industry to return to a more normal sense of processing, which in turn would remove one of the many sources of uncertainty weighing on markets,” Tonsor says (see “Cattle Economics” in October BEEF). “In that sense, the plant can't reopen soon enough. That said, broader market developments before early August reflected ongoing pressure on feeder cattle prices that are not envisioned to change drastically when the Holcomb facility returns to full operation.”

USDA will likely conclude its investigation into markets following the fire early next year.

CATTLE MARKET WEEKLY by Wes Ishmael

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