Supply and demand fundamentals, and good old-fashioned leverage, were on glaring display the last week of May as negotiated cash fed cattle prices jumped $3-$9/cwt. week to week on a live basis, from $175-$180/cwt. in the Southern Plains to $183-$188 in the North.

For broader perspective, the weekly weighted average five-area direct fed steer price was $177.94 the last week of May, which was $38.87 more than the same week last year. The average fed steer price in the beef was $284.36, which was $60.37 more year over year.

At the same time, dwindling beef production and resilient consumer beef demand were supporting Choice boxed beef cutout values around $300/cwt. and beyond. Estimated year-to-total cattle slaughter the week ending June 3 was 478,000 head fewer (-3.4%) year over year. Estimated year-to-date beef production was 552.1 million lbs. less at 11.3 billion lbs. (-4.7%).

Cash calf and feeder cattle prices continued strong, helped along by recent widespread moisture.

Weighted average regional feeder steer prices (600-700 lbs.) in the South Central region the week ending May 27 were $63.59/cwt. more than the same time a year earlier at $233.44/cwt., according to USDA’s National Weekly Feeder and Stocker Cattle Summary. Weighted average prices were $68.15 higher in the North Central region at $252.76 and $60.01 more in the Southeast region at $216.98.

USDA’s Economic Research Service (ERS) raised the expected second-quarter feeder steer price by $5 to $204/cwt. (basis 750-800 lbs., Oklahoma City) in the May Livestock, Dairy and Poultry Outlook. The increase was based on recent data and forecast declines in season-average corn prices, according to ERS analysts. 

Projected feeder steer prices were unchanged for the third quarter at $214, but $4 lower in the fourth quarter at $220. The average annual price was little changed at $205.37. ERS projected next year’s annual average price at $220.75.

Pace of herd expansion drives prices ahead

As welcome as significantly higher cattle prices are to producers, Andrew P. Griffith, agricultural economist at the University of Tennessee cautions the economic incentive for rapid herd expansion could add to eventual downside price pain.

“There is no reason to say the prices represented on the futures market are not attainable. However, if cash prices reach such a level in today’s economic environment, it will likely do more harm to cattle industry participants than good over the next five to eight years,” Griffith said, in his early-June market comments. “The concern here is some repeat performance of 2016 through 2018 following the strong prices in 2014 and 2015.”

It was a classic example of feast or famine.

“There is no way to predict what cattle prices will look like in five years, but the price levels being anticipated the next 12 months scream and shout herd expansion at as fast of a rate as possible,” Griffith said. He explained a moderate pace of herd expansion would support stronger prices for a longer period, whereas rapid expansion sets the stage for a steep price decline.

In the meantime, Griffith noted narrowing to negative packer margins amid high fed cattle prices likely point to increased sector consolidation.

“The packers this will be toughest on are the smaller operations and the new operations that are trying to pay down loans,” Griffith said. “The large and established packers can deal with negative margins a little longer than those who are highly leveraged. Red margins are nothing new in the packing industry, but they are something new to many of the operations that have opened the past couple of years. Beef packers will be competing for a relatively small number of cattle the next couple of years, which could lead to buyouts, consolidation, or straight-out closures … This type of price environment will lead to changes in the cattle industry. What those changes are and how they impact the industry will only be revealed with time.”

In other words, margin operators are beginning to feel the squeeze.

Margins narrow

“Increasingly tight cattle supplies suggest that margins at all levels above the cow-calf sector will be squeezed in the coming months.  The severity of the squeeze and the timing will vary across beef industry segments,” according to Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his late-May market comments.

Stating with the cow-calf sector, Peel explained calf prices were currently about 50% higher year over year.  

“With calf prices increasing faster than feeder cattle prices, stocker margins or value of gain is eroding. However, similar to feedlots, the time lags in stocker production will allow the uptrend in feeder prices to offset part of the high calf purchase prices,” Peel said. “Calf prices are likely to continue increasing faster than feeder cattle prices in the coming months.” 

So far, feedlot returns remain positive, due to long time lags associated with the sector and the recent rise of fed cattle prices to record levels, according to Peel.

“The increase in fed cattle prices is balanced against the price of feeder cattle placed in feedlots roughly six months ago,” Peel said. “However, it’s just a matter of time before feedlot margins feel the squeeze of rising cattle prices. The prices of feeder cattle currently being placed in feedlots are up about 39% year over year. Feedlot break-evens for fed cattle will increase sharply by the end of the year.”

As for the packing sector, Peel pointed out margins are already being squeezed as the 25% year-over increase in fed cattle prices runs ahead of boxed beef prices, which are about 14% higher.

“Additionally, packers will face increased overhead costs as declining cattle numbers will reduce packing plant utilization rates in the coming months,” Peel said.

Finally, comes the retail sector, where Peel says prices have remained mostly static during the last 16 months.

“It appears that retail margins are decreasing as wholesale values are increasing faster than retail prices,” Peel explained. “The reported retail beef prices reflect only grocery sales and less is known about beef price adjustments in food service and export markets. The ability of retail beef prices to move higher as limited supplies and rising wholesale prices squeeze retail margins is perhaps the biggest concern in beef markets currently.”