Weigh the Market

Keeping calves on feed or forages later into the season may pay dividends this year.

(Progressive Farmer image by Mike Boyatt)

Price expectations are taking a step back, as fall calving season gets underway. While feeder calves will probably hold over $100 per cwt, many analysts advise caution as the industry balances growing beef supplies against uncertainties around trade and feed.


What may make this year especially challenging is the likely disparity between prices across different weight classes of cattle. Producers nimble enough to adjust and lucky enough to have forages or cheaper feed resources available late into the season should find an advantage in their ability to add weight to calves prior to sale.


Don Close, Rabo AgriFinance senior analyst, says he expects producers selling into the feeder-calf market to see a trend where buyers are looking for heavier-weight steers to shorten up days on feed.


"They will want a quick turnaround on that steer," Close says. "As a result of this mind-set, the calf with the longest feeding period, the traditional 5-weight calf, is going to be in last place."


Close's price outlook sets a floor for feeder calves in the $100/cwt to $105/cwt range, up until the last quarter of 2019. At that point, there's potential for the floor to bump up to around $115/cwt.


Producers with forages who can extend their seasons, backgrounders and grow yards with lower energy rations will be rewarded for taking the time to grow steers out more and precondition them.


"Later in the fall, with the risk of higher corn prices, I think we'll see calf prices pushed down more," Close adds.


According to USDA data, calf prices historically drop about 15% off the season's peak. The agency's third-quarter price forecast on Choice steers (5-area direct) was lowered $3 to $110/cwt, with the 2019 annual price forecast at $117/cwt, slightly below 2018's annual level of $117.12/cwt.

EXPANSION WRAPS UP


The mid-year cattle inventory report from USDA indicates cow/calf producers have largely moved away from herd expansion.


Beef cow numbers were reported at 32.4 million head for 2019, level with last year's number. Following fall cow culling, projections set the cow herd at around 32 million head by January 2020.


Beef replacement heifers, another indicator of producers' intentions, are down to 4.4 million head in 2019 compared to 4.6 million in 2018. This season's calf crop is also down, reported at 36.3 million, a 100,000-head drop compared to 2018. There was, however, a 2.3% increase in the number of cattle on feed moving into the fall.


Recent RaboResearch reports note the seasonal peak in fed cattle prices hit late-February and early-March 2019 at $128/cwt to $130/cwt. A record number of cattle on feed will likely keep pressure on prices for the remainder of this year and into 2020.


There's a possibility that market volatility because of unpredictable changes in the trade picture could yield unexpected positive results for sellers.

TRADE A PIVOTAL AREA


There are two areas producers should be especially aware of moving through the last quarter of 2019: trade and feed supplies.

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While beef exports have lagged year-earlier levels, coming in nearly 5% lower at the mid-year point, many in the industry expect China to come into the market strong during the last quarter.


CoBank lead economist on animal protein, Will Sawyer, notes African swine fever (ASF) caused the loss of hundreds of millions of pigs in China and Southeast Asia in less than a year. He says the expectation is for massive shortfalls in animal protein supplies in that part of the world well into 2020 and possibly beyond. Consumers there are already switching from pork to chicken and, to a lesser degree, beef to fill the void. The U.S. is in a strong position to increase exports of beef to these markets if tariffs are lowered. Pork exports could also see a boon unless an outbreak of ASF domestically should occur and bring a halt to sales. Currently, 30% of U.S. pork production goes to the export market.


Imports of U.S. poultry have been banned in China because of high-path avian influenza. That would leave those producers out when it comes to any increased export opportunities. Sawyer says it's likely China's poultry imports will largely come from Argentina, Brazil, Poland, Russia and Thailand.

FEED IS A WILD CARD


Probably the most complex part of the outlook picture this year revolves around livestock feed. The complexity is due to all the things the U.S. ag industry does not know yet when it comes to crop size and yield.


> CORN. At press time, USDA was still looking for a planted acreage number on corn the industry could put faith in. Normally by August, a planted acreage number is pretty firmly nailed down, leaving yield as the variable everyone watches. This year, because of late plantings and unseasonably wet conditions, acreage numbers have muddied the waters for prognosticators. At press time, USDA showed corn planted area up 3% to an estimated 91.7 million acres. DTN lead crops analyst Todd Hultman says he continues to be cautious about what lies ahead for corn producers.


Hultman believes 87 to 88 million planted corn acres is more in the ballpark of real-world projections. In early August, he expected harvest prices for December corn futures in the $3.90- to $4-per-bushel range, cash prices between $3.60 and $3.80.


"There is a possibility that the planted corn acres are significantly less than expected," he notes. "Should that be the case, we could see significantly higher corn prices ahead of us. At this point, I'd say that is a low probability event, but it is a possibility."


For Hultman, the line is around 86 million corn acres. If planted area is lower than that, the market will start to pencil in lower supplies and bring some bullishness to prices.


> SOYBEANS. The picture for soybeans and wheat, while tied to the uncertain corn market, is a little clearer. The overall outlook for soybeans is still bearish, Hultman notes, due to ending stocks on old crops that are over the 1-billion-bushel mark.


"We aren't really talking about a billion bushels on old-crop ending stocks, because we are looking at a smaller crop this year due to those spring-planting problems. It's also more likely we will have yield difficulties to account for," he explains.


Hultman believes a smaller soybean crop can take some of the bearish edge off this market. He has a trading range for November soybeans at $8.15 to $9.71 per bushel. At harvest, those prices would trend lower, possibly to the $8.50 to $8.75 range in November. In cash, he says harvest-time beans are likely to be in the $7.50 to $7.75 range.


On soybean meal prices, the market was quoting December meal at $312.50 per short ton at press time. That is down from 2018 levels, which averaged $325.40 last July.


> WHEAT. The U.S. will have no shortage of wheat moving forward. Production for the 2019–20 season has been bumped up 18 million bushels, to 1,921 million bushels. Exportable supplies are likely reduced on lower new-crop production forecasts. Ending stocks for 2019–20 are projected at 1,000 million bushels.


Hultman says looking at Kansas City hard red winter wheat prices, there continues to be market pressure as a world-record wheat crop looms.


"This world-record crop, expected to be around 771 million tonnes [mt], will likely leave us with heavy supplies here domestically," Hultman explains. "There's not much hope of wheat trading higher than the $4 to $4.25 range unless something bullish happens in the corn market."


Taking all of these levels into account, feed supplies certainly don't appear to be limited. There is a scenario, however, where feed supplies and prices take a more bullish turn. This links back to China's bout of ASF and its need to procure protein from other countries. It's a two-sided issue, where winners and losers are hard to figure out given today's trade uncertainties.


The decline in China's hog herd will negatively affect its imports of U.S. grain, specifically feed exports. That potentially hurts elevators, feed mills and soybean crushers focused on that market. CoBank's Sawyer says they are projecting soybean-meal consumption down by roughly 9 million metric tons (mmt)—equal to about 11 mmt of soybeans—and corn consumption down by about 28 mmt.


However, the analyst notes those businesses positioned to meet domestic feed and non-China feed demands could see more opportunities as livestock producers here and abroad gear up to try to meet those increased protein demands coming out of Asia.

THINK ABOUT TOMORROW


Florida's Chris Prevatt doesn't have much patience for the constant talk about trade agreements. He says they just never seem to materialize. Rather, the University of Florida ag economist is telling cow/calf producers to look at where the opportunities are today and, more importantly, tomorrow.


Prevatt believes there are two key things commercial producers should focus on now: preconditioning and preparing for the next upturn in the cattle cycle.


"We are seeing discounts averaging around $15 per hundredweight on 5- and 6-weight calves that are not preconditioned, are not uniform or are not in truckload units. I've seen as much as a $25 discount," he says.


One answer is obvious: Keep calves long enough to do a good job preconditioning them. For small producers or those without a defined breeding season, the other two areas can offer challenges.


"I tell people to forward-contract and then put the additional weight on them yourself. That is one way to go," he says. Prevatt adds the preconditioning advantage is especially important for those who can sell truckload units. For producers who can't, he recommends watching markets closely each week and moving to sell if there is a downward trend. At press time, Prevatt said producers in his area were looking at a range on 5- to 6-weight calves where the top was around $150/cwt. The bottom could get to around $120/cwt based on timely fundamentals.


In addition to forward-contracting cattle, Prevatt notes this is a good year to lock in prices on winter feedstuffs by prepurchasing.


"I think we will see a lot of producers in our area do this," he adds. "Last year, we didn't have all we needed, and we ended up paying more for it."


Lastly, Prevatt says as the cattle market seems headed for its cyclical low, it's time to prepare for 2021 and beyond.


"The industry expanded in 2015, 2016 and 2017 because the capital was available for expansion. But, if we look to the next decade, that's when producers can benefit from growth. We are almost at the bottom, so now you make plans to move forward. I think once we get to 2021, it's all very positive. I'd want to be well-positioned to take advantage of that."


Prevatt adds it sometimes seems counterintuitive to hold onto heifers and develop them when the market is low.


"But, that is how you take advantage of the highs," he stresses. "If you want to be ready for the market highs, you prepare during the lows. We have some good years ahead, and now is the time to think about that."

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