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Tuesday, September 20, 2016

Record feeders but margins still good

By Angus Brown  |  Source: MLA, Trade

Key points

  • Feeder cattle prices have remained very strong at above 370¢/kg lwt for the last six weeks.
  • Falling grain prices see the cost of gain for grainfed cattle at a five year low.
  • Continued strong Grainfed cattle prices sees lotfeeder margins maintaining strength, and feeder prices.

2016-09-20 Beef Fig 1

2016-09-20 Beef Fig 2

2016-09-20 Beef Fig 3

Feeders cattle prices are at record levels, having doubled in just over two years. Many would think the current prices are unsustainable for lotfeeders. This article demonstrates that things remain pretty good in the lotfeeding space, hence the continued demand for young cattle from this sector.

Figure 1 shows the average Eastern States Feeder Steer direct to feedlot prices.  Feeder prices have now spent six weeks at record levels just above 370¢/kg lwt.  Feeder prices have basically doubled since July 2014, and gained 25% since May.  When price spike so strongly, they often don’t manage to spend long at the top, so it has been unusual for prices to stay so strong for so long.

Supporting feeder cattle prices has been falling grain prices.  Figure 2 shows that since peaking in early April at 556¢/kg cwt, the breakeven price of 100 day feeders has fallen 12¢/kg, or $41/head, to 544¢/kg cwt, or $1,851 per head. 

While improving seasonal conditions have seen feeders face stronger competition from restockers, forcing cattle prices higher, they have also seen feed grain prices wane.  Feed wheat and barley have lost 10% in the last six weeks, and new crop values are similarly weak. 

While the cost of buying feeder cattle has risen, the cost of putting on kilograms to cattle is currently at its lowest level since 2011.  As such lotfeeders can afford to pay a lot more in ¢/kg than they are selling for, with the current comparison is cattle being bought for 373¢/kg, are being sold for 320¢/kg lwt.  Offsetting the difference in the buy and sell price is the very low cost of gain of around 166¢/kg lwt.

The good season, and recent supply disrupting rain, has seen Grainfed cattle prices rising back to close to a record high 591¢/kg cwt for MSA 100 day grainfed steers.  The recent rise in price, after a fall back in late August, is reportedly due to tight finished cattle supply thanks to transport disruptions, with processors trying to attract the more reliable grainfed supply. 

As a result margins on 100 day grainfed cattle have improved, with the indicative value currently back at $150/t, which is historically strong (figure 3).  

What does this mean?

While there is plenty of downward pressure on cattle prices, it’s not coming from feeders just at the minute.  Low costs of gain and strong margins on grainfed cattle are likely to keep supporting feeder prices, at least until grainfed cattle prices start to lose their lustre.  This is likely to be when supply of grassfed cattle improves, which may or may not happen over the next three months.

In the short term upside is possible if feeder cattle supply tightens further, but prices do seem to have reached an upper limit for now.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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