At the end of March, the quarterly Grain Stocks report looked like just what the doctor ordered for an ailing feeder cattle market. News of larger-than-anticipated corn stocks sent corn prices tumbling. This, in turn, stimulated a sharp rally in feeder cattle futures. The April Feeder Cattle contract surged from just over $138 right before the report to almost $146 in very short order. But while the favorable grain stocks reading provided sound fundamental justification for a rally, lower corn prices have not been enough to sustain higher feeder cattle prices. In fact, feeder cattle prices have retreated to levels lower than before the Grain Stocks-induced run. Last Friday, for example, the April Feeder Cattle contract closed at $134.02 – a life-of-contract low.
The steady decline in feeder cattle prices since the beginning of the year reflects the simple fact that cattle feeders have been losing money – lots of it. Calf prices last fall reflected expectations of sharply higher fed cattle prices this year as supplies tightened and prices rose in response. Supplies may have tightened, but prices haven’t done too much rising. The 5-Area weekly weighted average fed steer price worked out to $128.12 in the first week of 2013. It has exceeded that level exactly once since then – hitting $128.29 three weeks ago – and has averaged an extremely disappointing $125.87 for the year. With cost of gain in the vicinity of $1.25/pound and fed cattle prices of $125/cwt, feeder cattle that went on feed at $145 or better don’t work out too well. Great quantities of red ink have been spilled in the cattle feeding business this winter and early spring. Cattle feeders are increasingly unwilling and/or unable to pay up for calves while betting on a stronger fed cattle market down the road. Live cattle futures both reflect and reinforce this pessimism: there is not a 2013 contract on the board trading above $127 to start this week. It is against this mark that feeder cattle bids are being formulated. Last week at Oklahoma City, feeder cattle in the 750-800 pound range averaged around $130. We should be getting in the ballpark of a feeder cattle price that will work; however, there remains considerable uncertainty about feed prices. Corn prices have not yet recovered much from their drop following the grain stocks report, but the market will remain very touchy until this year’s crop is much closer to being assured. For now, cool, wet weather is fueling talk of late planting – not the kind of talk that inspires confidence in the feeder cattle market.
Cattle on Feed: Friday’s Cattle on Feed report offered no favors to the feeder cattle market. The report showed the on-feed inventory to be down 5% from a year ago. This was on the high side of pre-report estimates. Marketings were down 8%. With one fewer business days than last year, March marketings were expected to be well below year-ago levels, but the reported figure was right at the very low end of those expectations. Finally, placements in March were reported to be 6% above a year ago. This was far above the market’s expectations. So to summarize: larger than expected placements coupled with sluggish marketings, yielding an on-feed inventory on the high side of pre-report estimates. All in all, that’s a pretty bearish report. The placement figure is probably the most interesting part of the report, if only because it was the biggest miss for the pre-reports. It may well be that this year’s late spring had people throwing in the towel on backgrounding programs. Feed and hay supplies were tight going into the winter season. The late occurrence of some of the worst weather of the winter was likely more than some operations had the reserves to feed through.