Today I’m wrapping my February series on the state of commodity markets for several Texas High Plains commodities. Today I’ll discuss the challenges facing the cattle market, and reasons for some optimism moving forward. You can see similar posts for the wheat, corn, sorghum, and cotton markets by visiting my earlier February posts. Next week we’ll visit the ‘gain vs. grain’ decision for winter wheat and that all-important March 15 decision.
Photo Credit: Tiffany Dowell Lashmet
Dates and Deadlines
1/27/2021 – 3/3/2021 Each Wednesday – Master Marketer Amarillo Online Program
2/25/2021 – Annual Cold Storage
3/1/2021 – Annual Cotton System
3/4/2021 – Developing a Drought Management Plan for the Ranch
What I’m Reading
USDA signals acreage expansions in outlook – FarmFutures
Winter Storm Uri batters agriculture supply chain – FeedStuffs
How USDA Forecasts Production and Supply/Demand – Texas A&M AgriLife Extension
Today, (February 22nd) February ’21 Live Cattle opened at $115.50/cwt. March ’21 Feeder Cattle opened at $138.58/cwt. The current February ’21 Live Cattle price represents a 2.4% increase over the Dec. 1 close, and a 2.9% increase over the Sep. 1 close, tracking with seasonal indices. Meanwhile, the current March ’21 Feeder Cattle price represents essentially no change from three and six months ago, though that masks quite a bit of movement in the interim. The local average cash price for 4-5 cwt. steers across Tulia, Dalhart, and Amarillo last week was $173.69/cwt. The local average cash price for 7-8 cwt. steers last week was $132.01/cwt. Local average cash prices for cull cows ranged from $53.79/cwt. to $58.90/cwt. depending on quality.
There are many factors influencing the cattle market right now. I always go back to supply and demand influences, the fundamentals that come together to determine price. I would argue that the bulk of the factors influencing the current price are supply-based. We’ve had several recent reports that shed light on the state of the cattle supply.
Current Price Influences
The beginning of the cattle supply system is the cow herd. Growth or contraction in the size of the cow herd is the earliest indicator of where calf supply and calf price are going. The inventory report’s results showed cattle numbers down slightly, along the lines of analyst expectations. As of January 1, all cattle and calves totaled ~93.6 million head, down 0.21% from ~93.8 million head reported in 2020. This is the first signal indicating support for calf prices some time in the upcoming year. Fewer cows is indicative of fewer calves. Think back to the recent low point in cattle herd size, 2014. At that point in time the all cattle and calves inventory was ~88 million head. At the same time we saw record-breaking prices for calves and cull cows.
January Inventory Report
Source: USDA January 1 Cattle Report
The next stage in the production system for cattle is the feed yard. Obviously we have backgrounding and stocker operations, but the regular data source that influences the market at the next stage is the Cattle on Feed (COF) report. January’s report provided slightly bearish news, coming in at the high end of analyst estimates, 11.965 million head on feed. The bearish influence came from the unexpected influx of heavy cattle placed on feed in December. While most analysts had assumed the COVID-19 induced backlog of heavy fed cattle had been worked through the system, the January report suggested that might not be the case. Last week’s cattle on feed report showed a February 1 inventory up 1.5% from a year earlier.
The first two months’ COF reports suggest that cattle continue to be held and were carried over from 2020 into 2021. Though the initial cattle that were ‘backlogged’ as a result of COVID-19 disruptions were cleared, the echoes backward through the system will take a while to subside. Intermediate and light weight cattle from last spring were likely not held as long as fattened calves, but likely still spent more time in the yard that in a standard year. That being said, I expect to see comparatively lower values out of the COF report when compared to the same month in a previous year as we progress through 2021. The peak of the cow herd in 2019 suggests that the peak of the calf herd occurred in 2020, and therefore we will see declines once COVID-19 backlog echoes are eliminated. This is supportive for prices, particularly later in the year.
Cattle on Feed, 2019 – 2021
Source: USDA Cattle on Feed Report
Breakeven Influences
We often discuss the need to understand your own breakeven price to cover variable costs and total costs. The point at which average variable cost exceeds price is the shutdown point. When price rises above the shutdown point, it is within your financial interest to continue producing as you can dedicate some revenues towards fixed costs. The point at which average total cost exceeds price is the breakeven point. When price rises above the breakeven point, you have economic profits.
While I’ve taken time to look at specific breakeven prices in the District 1 Texas A&M AgriLife Extension Budgets I’m going to take a slightly different approach for cattle. Remember that these budgets are an approximation and apply ‘in general’ to a diverse area, from Swisher to Dallam county, and the production models that we see for cow/calf and stocker operations in the region are incredibly diverse. It is important to tailor these figures to your own operation, and because of the variability I will instead take the time to focus on factors influencing costs and therefore breakevens.
The number one expense in cattle production is feed. Whether your cattle graze, receive supplementation, or are strictly grain fed, the availability of feed has declined and the cost has risen. The dynamics of the feed market have changed dramatically over the last six months. First, forage is hard to come by west of, well, the Mississippi.
U.S. Drought Monitor Figures for Thursday, February 18, 2021 for the Continental U.S. and Texas
Source: U.S. Drought Monitor
The Drought Severity Coverage Index, the measure of ‘how bad’ a drought is has improved incrementally recently, but much of western Texas and the western U.S. are still suffering. The widespread drought means winter small grains and native pastures are not providing the necessary forage, increasing the price of hay. This will increase the breakeven price for calves, regardless of the production model. In addition to the lack of forage, high grain prices are pressuring cattle producers from the field to the yard. Supplementation of any kind, from grain to cotton and ethanol byproduct has become more expensive. Feeding cattle in the yard has become more expensive too, which pressures the price a feeder is willing to pay for calves being placed. Feed costs are the number once concern for break even management this spring.
Pricing/Marketing
As we push into spring, what should cattlemen be focusing on? First, as I said in the previous section, managing feed costs should be a number one priority right now. Price the feed you need to meet your herds nutritional requirements early. Poor performers should be culled. Cull prices have been stable for months now ranging from $50-$60/cwt. Culling has the added advantage of lowering your feed bill and increasing the reserves available to dedicate to your quality assets, those high performing momma cows.
Second, focus on your marketing decisions over the spring. If you’re a stocker operator on wheat, and you own that wheat, is gain or grain the right decision this year? We’ll evaluate that decision in next week’s blog. Beyond the pasture, is it worth retaining ownership of your calves into the feedyard? The cost of feed this year makes me suspect profits from that choice will be limited; I’ll also evaluate that in an April blog. Think carefully about what a ‘low performer’ is. If a cow has a calf on the ground, but she didn’t breed until a second or third round, is she worth retaining? Is there more profit from marketing the pair together, rather than paying to feed them both to see how she does next year? Finally, don’t forget to take advantage of programs that help you manage price. Look into Livestock Risk Protection, and if you suffered losses in the storm last week review the Livestock Indemnity Program.
Lastly, remember that the forecast is for higher prices in the fall of 2021 than in 2020. Spring-born calves should net higher returns than last fall’s calves.
As always, if you have questions, suggestions, or comments give me a holler at benavidezjustin@tamu.edu