Why Cattle Futures have climbed to their Highest Prices on Record

MarketWatch

Cattle futures have climbed to their highest prices on record as drought conditions in the southwestern United States devastated the animals’ feeding grounds, contributing to a drop in the size of the domestic cattle herd to its smallest in eight years.

The “intractable” drought in the southwestern U.S. that encompasses prime cattle breeding operations—in Texas, Oklahoma, Kansas and Nebraska—led to a culling of female animals over the last one-and-a-half years, said Walter Kunisch, Jr., senior commodities strategist at HTS Commodities.

The U.S. cattle and calves inventory as of Jan. 1 of this year totaled 89.3 million head, down 3% from the Jan. 1, 2022 total, according to the U.S. Department of Agriculture’s biannual Cattle report. That was the smallest since 2015.

The drought in the Southern Plains meant that there was less grass for the cattle to feed on, said David Maloni, president of foodservice supply chain consultancy Datum FS. Cattle supplies have fallen about 5% since peaking in 2019 due to “poor pasture conditions caused by drought, elevated feed costs, and poor margins.”

Prices for feeder cattle, which are cattle purchased for the feedlot market, and live cattle, which have reached slaughter weight in the feedlots, marked record-high settlements on Tuesday, according to FactSet data.

Ultimately, feeder cattle become live cattle so higher feeder cattle prices can cause high prices of live cattle, said Kunisch. “As feeder cattle cash and futures prices soar to record levels, we have a hard time seeing an end to the secular bull market for the U.S. cattle complex,” he said.

Feeder cattle for August delivery settled at 243.25 cents a pound Tuesday on the Chicago Mercantile Exchange, a record high for the most-active contracts based on data going back to November 1971. Prices trade around 33% higher so far this year.

August live cattle settled Tuesday at an all-time high of 175.5 cents a pound based on data as far back as November 1964, with prices up roughly 11% year to date.

Demand has also been a key factor leading to record high prices for cattle.

The high prices are a reflection of tighter supplies as well as “continued exceptionally strong demand for beef,” said Lance Zimmerman, Rabobank senior beef analyst, adding that the strength in consumer beef demand appears to have “caught futures market participants by surprise.”

The cash market for fed cattle, also referred to as live cattle, rallied from late March into early April and last week, averaging a week-over-week gain of $4 per cwt. or hundredweight, which is equal to 100 pounds, and making new all-time highs of $182 per cwt., said Zimmerman.

“The futures markets have taken more of a ‘prove it to us’ stance relative to beef demand, and the cash market continues to prove that demand for beef and fed cattle remains relatively strong,” he said.

Zimmerman said the USDA boxed beef cutout price, which represents the wholesale price of the beef carcass, has averaged $287 per cwt. year-to-date through last week, compared with $270 last year through the same period.

From January to April 2022, wholesale beef demand marked a 30-year high and while indexes tracked by Rabobank suggest demand through the same period this year is 8% softer, that still ranks as the second-highest demand from January to April, he said.

Despite the economic headwinds facing consumers, “they are still supporting a healthy and strong beef and cattle market,” said Zimmerman. “The higher prices seen in the futures markets are not all about tighter supplies.”

Pasture conditions are expected to improve but that won’t soon alleviate the tight cattle supplies.

Kunisch believes that at some point this year, “mother nature will deliver a drink of rains and moisture to key cattle breeding states” and that will help repair pasture conditions.

However, as moisture enters these states, the upstream cow and calf producers will want to retain female animals for breeding and as that “scenario hastens, we believe that the supply of feeder cattle will contract and push both live and feeder cattle prices higher,” said Kunisch.

Meanwhile, supplies of corn, a key feed input for cattle, in cattle feeding states such as Texas, Kansas and Nebraska, are tight and cost of inputs is high, he said. “Until the western drought retreats, corn prices are likely to stay high, which can help support live cattle prices, he said.

Corn futures on the Chicago Board of Trade ended Wednesday with the most-active July contract at $6.08 a bushel, above the trading range of around $3 to $5 from mid-2014 to early 2021. They’ve fallen by around 11% this year.

Feed costs have softened due to bigger crops in South America and expectations of bigger crops in the U.S. this fall, said Maloni, adding that he “anticipates feed supplies to improve considerably with the domestic harvest later this year, but we need better weather and have a long way to go before these crops are ‘made.”

Retail beef

At the retail level, consumer beef prices have been trending “steady to lower” since the record high prices at $7.55 a pound established during the COVID-19 pandemic in October 2021, Rabobank’s Zimmerman.

Current USDA prices are 22 cents cheaper than those highs, he said, but the higher underlying cattle market values and stronger wholesale beef prices suggest that retail prices will start moving higher throughout the summer and fall.

Everyday meat case price for beef items is trending closer to year-ago levels and Zimmerman said it’ll start to “inch higher through the rest of 2023 and over the next several years.”

He said that has to do with tighter supplies and higher cattle costs, but prices also reflect “demand dynamics.”

On average, U.S. consumers have to work about 15 minutes to provide a serving of beef for each member of their family.— Lance Zimmerman, Rabobank

“Consumers still view beef as an expense that is worth the higher prices and it is still generally cheap,” Zimmerman said. On average, U.S. consumers have to work about 15 minutes to provide a serving of beef for each member of their family, he said.

“There is more higher quality beef on the market than at any point in history and the juiciness, tenderness and flavor of beef cannot be replicated by any other protein item.”