Livestock > Outlook & Prices > Prices
May 2020
Strive to market fed cattle at optimum weight – even in tough times
No one should downplay the pain, suffering and death those hardest hit have to endure. Importantly, we should commend all those on the front lines who are doing their best to control the virus and protect our lives.
Still, life and business goes on. Farmers must manage their operations as best they can, no matter how turbulent times get.
Biology drives agricultural production. The calendar dictates when farmers need to do things. Farmers must plant and harvest on time. The window of opportunity for grain production activities is often very narrow. The marketing window can stretch over many months. That’s because grains are storable.
The production and marketing windows for livestock are much narrower. Finished fed cattle are not storable. In a matter of days market-ready cattle can go from having top market value to being over fed and over finished with a lower value.
Estimated cattle slaughter for the week ending May 2, 2020 was 425,000 head, down 37% year over year (Figure 1). Over the past four weeks, total cattle slaughter has averaged 26% lower than last year, a decrease of 685,000 head which is more than one week of cattle slaughter at this time of year. The backlog of slaughter cattle is growing rapidly.
Therefore, producers, to the best of their ability, must maintain the flow of animals. A fed cattle slaughter slow down does, obviously and adversely, reduce the demand for fed cattle and is out of the control of producers. Having a market that will take finished cattle at a suitable date has become a concern. In addition, current market prices, if even available, have left many cattle feeders searching for solutions to reduce their economic loss.
The Iowa Beef Center, Iowa State University Extension beef specialists, University of Wisconsin Extension livestock program educators, and University of Wisconsin Department of Animal Science faculty have provided Considerations for Slowing Feedlot Cattle Growth due to the COVID-19 Pandemic. These strategies would allow cattle to be held until they can be assigned a harvest date within a reasonable time frame.
For fed cattle ready or near ready for market, it is best to market these cattle when opportunities present themselves, even during crashing prices. As such, producers should stick with time proven production and marketing practices. Here are two specific examples, under the assumption that cattle can be marketed.
Always strive to optimize market weight
Sagging fed cattle prices fuel temptation to delay marketing, add days on feed and hope prices rebound. The catch with “hold and hope” is that it packs on pounds. Extra pounds boost beef supply into an already softening market.
The economic decision point for the optimal weight at which to market fed cattle is where marginal cost of the last pound of gain equals marginal revenue from that last pound of gain. The concept is simple. Putting it into practice can be difficult because both marginal costs and marginal revenue change as the feeder grows. Constantly tracking the data takes time. Still, this decision point should always be the market weight target-even in rapidly fluctuating markets.
Marketing cattle later will boost feed costs as total pounds of feed fed climb. Cattle feeders typically talk about average cost of gain for the entire feeding period. It is calculated from the closeout. But average cost is worthless when trying to figure optimum market weight.
The important number is the marginal cost of gain as cattle approach market weight. Average cost of gain changes slowly, but marginal cost of gain changes rapidly. Marginal feed per gain, or pounds of feed for the next pound of gain, rises at an increasing rate as cattle near market weight. In addition to feed, interest and out-of-pocket yardage cost are also part of marginal cost.
Marginal revenue is the change in income from selling later. It, too, is a moving target. Yes, there are additional pounds to sell. But heavier cattle may actually bring less if prices fall further while the cattle gain weight. Plus, carcass merit and value of the cattle can change with weight. Grid pricing, for example, consists of a base price with specified premiums and discounts for carcasses above and below a base or standard set of quality specifications. USDA’s Agricultural Marketing Service reports premiums and discounts weekly in its 5-Area Weekly Weighted Average Direct Slaughter Cattle – Premiums and Discounts Report. For the week of May 4th, the discounts for carcass weight ranged from minus $15/cwt to $0/cwt for 900 to 1,050 pounds and minus $25/cwt to minus $10/cwt for over 1,050 pounds.
As weights rise, percent of cattle grading Prime, Choice, Select and Standard can change. Yield grade may also change. The pen may have more yield grade 4’s and 5’s and fewer 1’s and 2’s. Premiums and discounts associated with various carcass traits vary across packers at any point in time as well over a period of time.
Currentness refers to whether producers are marketing cattle on a timely basis, or keeping them on feed longer. Keeping marketings current is generally positive to market prices. Too many producers "holding and hoping" beyond the optimum marketing weight can quickly cause an oversupply of both market-ready cattle and over-fed over-finished cattle, which drives prices down.
United States feedlot inventories as of April 1 were 5.5% lower than a year earlier according to USDA’s Cattle on Feed report of 1,000+ head capacity feedlots. But focusing only on total number on feed is insufficient. Producers need to pay close attention to the supply of cattle that have been on feed for some time and thus will be available to come to market in the next 30-60 days. This is the supply that feedlots will draw upon when they offer cattle. As of April 1, the number of cattle that had been on feed at least 120 days was estimated at 4.481 million head, 3.2% lower than a year ago (Figure 2).
This is a sign that to begin April the market was relatively current. The ramp up in slaughter at the end of March helped fill the surge in consumer demand at retail stores and equally helped keep fed cattle supplies current. But, this must be maintained.
Currentness is a metric of leverage. Given similar fundamentals, the difference between extreme currentness and extreme uncurrentness can translate into a swing of $5-$10 per cwt in fed cattle prices.
Maybe more. Take September through December of 2015, for example, when there were an additional 433,750 head, on average, of cattle on feed more than 120 days in 1,000+ head capacity feedlots than there was the year prior. There were 685,800 head more when compared to 2009-13 average. The supply of heavy fed cattle was even more pronounced, on a percentage basis, in feedlots with less than 1,000 head capacity according to the Iowa data, which is only state that reports these cattle on feed numbers.
In pursuing market incentives to delay cattle marketings and push cattle to heavier weights, a feedlot would be trading animal performance on animals currently on feed for the costs of replacing inventories with new animals. Potential gains from this tradeoff are limited. The incentive to hold can change abruptly with feed, feeder cattle and fed cattle prices.
Cattle feeding risks rise, but returns could too
Economists typically talk a lot about risk and return tradeoffs. Whoever accepts the most risk should also have the opportunity to receive the greatest return. The cattle business is no different. It could be the quintessential example.
The supply of feeder cattle does vary with the cattle production cycle. Supply is easier to pin down than demand. Demand is the more important factor in determining market price. How much feedlot operators are willing to pay for feeder cattle comes from projected cost of gain and slaughter cattle price expectations, with the latter being the most important factor. As fed cattle prices collapsed, feeder cattle prices did too.
Feedlots may tend to want to delay placements at a time like this. Current feeding margins are deep in the red, even at the lower feeder cattle prices. However, even in a negative margin environment leaving pens empty and the feedlot at reduced capacity may not be an optimal decision. In the short-run, as long as revenue covers variable costs and leaves some income to cover part of the fixed costs, maintaining production loses less than letting facilities sit idle.
Another consideration may be equally important. The fed cattle market collapsed under unexpected COVID-19 pressure. Some other totally unexpected event could trigger at least a moderate rebound. If it does at some point in the near future, cattle feeders who buy feeder cattle at low prices may be well- positioned to make profits. That’s a bit of a different spin on "hold and hope."
Lee Schulz, extension livestock specialist, 515-294-3356, lschulz@iastate.edu
