| OU 342 | September 23, 1998 |
The beef market is undervalued. Feeder calves are $15 to $20 per cwt. below last year's price and the fall run on prices is just around the corner. Carolina beef producers need to stay aware of what is occurring in the industry so that they do not sell their calves for less than they are worth.
The available supply of fed cattle continues to be at record levels with September inventories 15 to 20 per cent above last year. This figure reflects the large spring placements and sluggish marketings this summer. Cattle slaughter weights are still 25 pounds per animal above last year. The net result of these actions is that slaughter rates must now be over 700,000 heads per week to adequately market existing supplies and keep inventory levels from growing any further.
What does this bottleneck at the feedlot mean for Carolina calf producers? Since feeder calf prices are heavily dependent upon fed cattle prices, it is unlikely that any nearby relieve is in sight. Higher fed cattle prices are probably just a dream until these record supplies of beef are moved out. What is keeping fed cattle prices down? Record beef production, record pork production, large poultry supplies, poor export demand and historically large captive fed-cattle supplies. These are formidable factors and together they are keeping beef undervalued in the marketplace.
When will cattle producers see a turn around in the market? Not until the feedlot problem is cleaned up. And, it appears likely that these large inventory levels and heavy carcass weights are going to be with us through the winter. The Market News Service reports, dated September 21, 1998 from the Texas Panhandle indicated that steers and heifers sold, on average, for $59 per cwt. Live cattle futures are currently trading in the low to mid sixties: October at $62.18, February at $64.35 and April at $65.75 per cwt.
Feeder calf prices are expected to be flat in the fall. Current Carolina auction prices for 700-800 pound feeder steers are $57.50 per cwt. Lighter weight 400-500 feeder calves are trading at $68 per cwt. If we have a somewhat normal fall run for feeder calves and the fed market stays depressed, there will be little improvement in calf prices.
Wheat pasture states are reporting mixed prospects for wheat plantings. Most of the southern wheat belt still needs rain. The futures market is counting on it raining and wheat pasture availability. Feeder cattle futures are trading in mid September at $68.53, October at $70.35, and April 1999 at $72.00, equating to a Carolina price for 700-800 weight feeder cattle at approximately $60 per cwt. This is at least $10 per cwt. above current local auction prices.
Now for some positive news. The fact that the 1998 calf is so undervalued will help feedlots turn around and be profitable in 1999. Lower calf prices this fall (compared to fall 1997 and spring 1998 prices), coupled with a better outlook on feed prices, will mean a lower fed cattle break-even price. A lower break-even price will improve feedlot profits; even if the demand for beef doesn=t improve. Down the road improved feedlot profits, and a known smaller calf crop, projects better prices for the calf producer.
The USDA Jan 1. 1998 Cattle Inventory confirms that we are still in the liquidation phase of the cattle cycle. Total cattle numbers are still falling, and more importantly beef heifers held for replacements continue to decline. Producers are feeding heifers and not breeding heifers.
The 1997 calf crop was down by 3 percent, implying that there will be fewer cattle on feed in 1998. A smaller beef cow herd and fewer replacement heifers in 1998 suggest that the 1998 calf crop will be smaller. This trend appears to be present through the year 2000. As cattle numbers continue to decrease over the next few years, feedlots are simply not going to have cattle to feed. The continued diversion of heifers into feedlots confirms this senario.
In summary, the near-term is suggesting that cattle prices will continue to be depressed until feedlot inventories are substantially reduced. When will this reduction take place? The best guess NOW is that it will be late fall (very late) or more likely winter before this will occur. The longer-term prospects are much brighter. The beef herd is still declining. Beef heifers are still going into feedlots and not into the breeding herd. If we can EVER get over this feedlot problem, the future looks much better for the beef industry.
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