Since the October low of $97.59, fed cattle prices have posted a 28.5percent rally, trading in a range of $124.00 to $128.00 in mid-March. The market recovery rally has offered even the most bullish of market forecasters everything they expected and, for most of us, even more. With the benefit of hindsight, we know that the $97.50 lows recorded in October were lower than where the market should have traded. But even with that perspective considered, the fed cattle prices have staged an incredible rally. The strength in the current market even has the potential to impact prices later in the year, despite the fact that fed cattle supplies are expected to increase substantially.
This market is exceeding the price forecasts I saw at the beginning of the year, and doing so without the same degree of volatility that was present in 2014 through 2016. With that said, the market is dealing with record and near-record basis levels that have yet to be corrected, so it might be a little premature to claim that excessive volatility has been removed from the market.
Fed Cattle are currently closing out with exceptionally good profits...
So what has changed? What are the drivers enabling the early 2017 market to meet and exceed expectations?
Well, first and foremost, the impact of lighter-than-expected placements of cattle in September and October has curtailed February and March fed cattle supplies to a much greater extent than expected. This is especially true in the Corn Belt.
Fed Cattle are currently closing out with exceptionally good profits in a range of $150.00 to $200.00 per head. When basis gains of $2.00 to extremes of $7.00 per cwt. are added to the current cash sales, cattle feeders are having a very good run, which is encouraging them to aggressively sell cattle.
Mild temperatures in the northern feeding areas have caused exceptionally muddy pen conditions through a period when pens are usually frozen. We’ve seen carcass weights decline due to a reduction in Holsteins as a share of the total fed slaughter mix and an increase in heifers in the slaughter mix. For the week ending Feb. 25, steer carcass weights were nine pounds below a year ago and heifer carcass weights were off 12 pounds from a year ago. The lower carcass weights are offsetting a large share of the impact of escalated slaughter rates.
Given the exceptional basis levels, anticipation of larger fed cattle supplies right around the corner and profitability of selling in the current market, cattle feeders are expected to continue to be aggressive sellers.
U.S. beef exports have been exceptional.
While all of the above circumstances are certainly contributing to the better-than-expected run in the market, there are additional components that are likely making an even bigger impact on prices.
In the initial weeks after the election, the market was filled with renewed enthusiasm labeled the “Trump Bump.” Initially, that momentum was expected to be short-lived, but it continues. The monthly jobs report released on Friday, March 10, noted an increase of 234,000 jobs for the month of February and the majority of those additional jobs are thought to be from small businesses. There is simply a more positive tone on Main Street.
Added to the stronger economic attitude in the general market, the weather over a majority of the south, southeast and Midwestern regions has been warmer than normal; in many locations temperatures have been as much as 10 to 15 degrees above normal. This bump has encouraged many to fire up their grills well ahead of schedule.
Finally, U.S. beef exports have been exceptional. Export stats since the middle of 2016 tell a good story—July up 8 percent, August up 29 percent, September up 30 percent, October up 17 percent, November up 25 percent December up 30 percent and January up 21 percent over a year ago. The steep decline in U.S. cutout values starting last summer has clearly stimulated additional export sales.
Additional strength in the dollar is anticipated as U.S. interest rates start to increase...
Many were concerned that the post-election surge in the value of the U.S. dollar would be a detriment to exports. So far, that does not appear to be the case. While so many are talking about the strength of the dollar, it is important to point out that in a long-term perspective, the dollar is just marginally above the historical average. It isn’t that the dollar is so strong currently, it is that it has been exceptionally weak going back to the 2008 recession. Additional strength in the dollar is anticipated as U.S. interest rates start to increase, per the Fed’s most recent move.
Gains in U.S. exports have come at the expense of Australia. Australian producers have seen the lowest cattle inventory totals in 20 years due to the impact of the 2012 to 2015 drought. Better conditions in a number of areas have led to herd rebuilding and heifer retention much like what we saw in the U.S. in 2014 - 2016.
On a carcass-weight calculation, the U.S. has never been able to exceed 10 percent of production going to exports. And, while it is much too early in the year to be making calls on annual exports, 2017 could very well be the year when U.S. exports break that trend. If the export pace holds anything near what has been recorded over the past seven months, fed cattle prices could continue to trade above levels that were generated using conventional export expectations.