November dairy economic update: Make winter plans

The transition to colder temperatures has been accompanied by cooler markets. Here’s a look back at factors affecting prices and margins.

September milk prices dip

September 2017’s U.S. average milk price of $17.80 per hundredweight (cwt) was down 20 cents from August, and up just 40 cents compared to September 2016, according to the USDA’s monthly Ag Prices report. The January-September 2017 average of $17.59 per cwt is $1.79 more than the same period a year earlier.

Among individual major states (Table 1), Idaho, Iowa, Utah, Virginia and Wisconsin posted small gains (+10 to +20 cents) compared to a month earlier; California led decliners (-62 cents).

Compared to a year earlier, September 2017 milk prices were up $1.20 in Washington and 90 cents in Ohio and Pennsylvania. Only New Mexico saw a price decline, down 20 cents compared to a year earlier.

MPP-Dairy margin shrinks a little

Combined with higher soybean meal and alfalfa prices, the lower milk price tightened U.S. average income margins for September, at least according to MPP-Dairy calculations.

September’s soybean meal price was up $6.65, to $307.70 per ton. Alfalfa hay averaged $149 per ton, up $2 from August. The U.S. average price for corn received by growers was unchanged from August, at $3.27 per bushel. The overall feed cost was $7.81 per cwt of milk sold, up 8 cents from August (Table 2).

Subtracted from the average milk price, the September MPP-Dairy income margin was $9.99 per cwt, down 28 cents from August.

The September MPP-Dairy calculations are the first half of two-month factors used to determine potential payments for the September-October pay period. The October MPP-Dairy margin and September-October pay period margin will be announced Nov. 30.

Based on milk and feed futures prices as of Oct. 30, the Program on Dairy Markets and Policy projected monthly MPP-Dairy margins to decline through May 2018, bottoming out below $8.50 per cwt. Those margins are above MPP-Dairy indemnity payment triggers, but watch markets for changing conditions.

Replacement cow prices steady

U.S. dairy replacement cow prices are ending the year about where they began. However, prices could be pressured lower as cash-strapped dairy farmers seek to sell surplus heifers.

Preliminary October 2017 U.S. quarterly replacement dairy cow prices averaged $1,610 per head, just $10 less than both January and July 2017, and $80 per head less than October 2016 (Table 3).

National average replacement cow prices are now $510 (24 percent) less than when they last peaked at $2,120 per head in October 2014.

The USDA estimates are based on quarterly surveys (January, April, July and October) of dairy farmers in 23 major dairy states, as well as an annual survey (February) in all states, according to Mike Miller, with USDA’s National Ag Statistics Service. The prices reflect those paid or received for cows that have had at least one calf and are sold for replacement purposes, not as cull cows. The report does not summarize auction market prices.

Among major dairy states, October 2017 average prices ranged from a high of $1,750 per head in Colorado to a low of $1,490 in Virginia. A handful of states – Florida, Iowa, Michigan, Minnesota, Oregon, Pennsylvania, Texas and Virginia – saw October replacement cow prices slightly higher than July.

Tony Clayton, Clayton Agri-Marketing, Jefferson City, Missouri, said he’s fielding calls almost daily from dairy farmers seeking to sell heifers to generate cash.

September cull cow prices dip

September 2017 cull cow prices (beef and dairy combined) averaged $69.90 per cwt, down $6.40 from August and $4.60 per cwt less than September 2016. Year-to-date, the cull cow price average is $71.54 per cwt, down $7.38 from January-September 2016.

Wednesday Midday Livestock Market Update - Firm Gains Hold in Cattle Futures Midday Wednesday

GENERAL COMMENTS: 

Firm support is seen in cattle futures with moderate buyer activity seen through the morning. This is helping to set additional contract highs across the complex, although the momentum seems to have slowed from earlier week activity levels. Corn prices are higher in light trade. December corn futures are 2 cents per bushel higher. Stock markets are mixed in light trade. The Dow Jones is 34 points higher while Nasdaq is down 23 points.

LIVE CATTLE:

Light to moderate buyer activity is able to step back into the market early in the month, although gains have been hard to find additional support Prices are holding 20 to 70 cent gains with increased support pushing to new contract highs once again, although traders remain generally sluggish through midday. Cash cattle activity remains generally sluggish with a few bids developing in Nebraska at $183 to $184 per cwt. Active trade is still likely to be pushed off until sometime Thursday or Friday. The Fed Cattle Exchange Auction report today listed a total of 1,515 head, with 274 actually sold, 913 head listed as unsold, and 328 head listed as PO (Passed Offer). The state by state breakdown looks like this: KS 1,081 total head, with 0 head sold, 913 head unsold, 168 head listed as PO ($119.50); NE no cattle reported; TX 434 total head, with 274 head sold at $120.00, 0 head unsold, and 160 head listed as PO ($120.25); CO no cattle reported; IA no cattle reported; other states no cattle reported. The delivery date/weighted averages breakdown is as listed: 1-9 day delivery: 1,515 head total, 274 head sold, with a weighted average price of $120.00. Beef cut-outs at midday are higher, $0.67 higher (select) and up $0.59 per cwt (choice) with light movement of 74 total loads reported (50 loads of choice cuts, 16 loads of select cuts, 0 loads of trimmings, 8 loads of ground beef).

FEEDER CATTLE:

Traders are backing away from initial strong gains seen early in the session, although traders have been able to find some stability at midday. Nearby futures are holding 70 to 80 cent gains in all but November futures as traders are looking for increased buyer interest through the next several trading sessions.

LEAN HOGS:

Light pressure continues to hold in nearby lean hog futures trade following the sharp rally at the end of October. But firm support is developing through the rest of the complex as overall volume remains light during November 1st trade. This may spark additional buyer support as traders are looking more for long term buyer activity through the rest of the year. Cash prices are lower on the National Direct morning cash hog report. The weighted average price fell $0.31 at $63.97 per cwt with the range from $57.50 to $64.75 on 5,418 head reported sold. Cash prices are unreported due to confidentiality on the Iowa/Minnesota Direct morning cash hog report. The National Pork Plant Report posted 194 loads selling with cutout values increasing $0.10 per cwt. Lean hog index for 10/31 is at $69.08 down $0.01 with a projected two-day index of $69.30, up $0.22.

Wednesday Morning Livestock Market Summary - Look for Cattle Futures to Open at Least Moderately Higher

GENERAL COMMENTS:

We should start to see a few preliminary bids in feedlot country at midweek, though it would be quite surprising if they prove attractive enough to spark selling. Indeed, feedlot manager will be reluctant to price showlists prematurely, waiting to get a better handle on the board's full bullish stretch. Our guys is that significant trade volume will once again be delayed until sometime Friday.

Hog buyers are expected to resume procurement work with bids steady to $1 lower. Processing margins have narrowed in recent weeks, and packers would like to be a better handle on the cost of live inventory if possible. The Saturday kill is currently estimated at 170,000 head. Lean futures should open on a mixed basis thanks to follow-through buying on one hand and profit taking on the other.

	BULL SIDE		BEAR SIDE
1)	Live and feeder futures fielded strong follow-through buying on Tuesday with most months once again setting new contract highs. The board definitely wants to keep leading cash markets higher.	1)	Given attractive deferred live premiums and the persistence of cheap feed, October placement activity likely remained well above the fall of 2016.
2)	Beef cut-outs closed sharply higher yesterday with the choice box surging more than $3 (i.e., closing at its highest point since July 27).	2)	Technically speaking, live and feeder cattle futures look significantly overbought and due for a corrective sell-off.
3)	Nearby lean hogs also soared to new highs on Tuesday, perhaps reflecting big bets on the strength of U.S. exports over the next several quarters.	3)	The cash hog market faltered on Tuesday, and the combination of lower bids and larger country receipts suggests that psychology is on the verge of turning south.
4)	Early bird estimates the weekly hog slaughter are pulling back below last week's level, averaging little more than 2.45 million head.	4)	China's importation of pork continues to lag far head 2016 levels (see article below). With U.S. production shifting into high gear, a recovery in Chinese appetite is critical.

OTHER MARKET SENSITIVE NEWS 

CATTLE: (beefmagazine.com) -- Prospects for increasing beef exports come at a fortuitous moment in U.S. beef history. Without them, odds favor further industry contraction over time.

Such an observation might seem bold, given the fact that all beef produced in the U.S. is always consumed at some price, and that the national cowherd is currently in the midst of the first cyclical expansion in about two decades.

Consider this, though; U.S. beef never recovered the 20% domestic demand lost from about 1977 to 1997. Total beef production last year was about 25.3 billion pounds, according to USDA's Economic Research Service. That's about what it was in 1995. During that timeframe, production was as high as 27.2 billion pounds in 2002, and as low as 23.7 billion pounds in 2015.

During the same period, total U.S. meat and poultry production grew most years; it was 97.3 billion pounds last year. Along the way, the U.S. population grew by about 21% to 323.4 million in 2016.

Notwithstanding drought-forced liquidation in recent years, that's one reason there were 31.2 million beef cows at the beginning of this year, as opposed to 36.1 million in 1995, let alone the peak number of 45.4 million in 1975.

In the last decade, as the nation's cow herd contracted in the wake of prolonged drought, beef packing capacity and cattle feeding capacity left the business. It's easy to imagine a quick restoration of the latter, but not the former.

In order to maintain the current industry infrastructure — packing and feeding capacity, allied service providers, etc. — the nation's beef cow herd likely needs to be at or above 31 million cows or so over the long haul, according to Sterling Liddell, senior analyst of data analytics for RaboBank's RaboResearch Food and Agribusiness. HOGS: (blackseagrain.net) -- China imported 920,508 tonnes of pork valued at USD 1.7 billion in the first nine months of 2017, down 28.0% and 34.1% respectively from a year earlier, said the China Customs. Meanwhile, China's domestic pork production rose 0.7% to 37.2 million tonnes, according to the National Bureau of Statistics.

The nation's frozen chicken imports also fell sharply in the nine months, down 23.4% at 329,657 tonnes. However, imports of beef and mutton products maintained growths, rising 14.7% and 2.9%, respectively, to 502,887 tonnes and 187,812 tonnes.

Tuesday Closing Livestock Market Summary - Livestock Futures Rally on Month End Buying

GENERAL COMMENTS

Cash cattle remain undeveloped Tuesday afternoon with bids and asking prices still undeveloped. Given the surge in cash prices last week and follow through support in futures trade, it is a safe bet that feeders will price cattle higher and remain focused on these prices for most of the week. But feedlot managers have good reason for not being willing to show their hand too quickly given the aggressive tone of the entire market. Bids and asking prices will likely become more evident Wednesday, although active trade may be delayed until the end of the week. According to the closing report, the national hog base is $0.43 lower compared with the Prior Day settlement ($58.00-$65.36) weighted average $64.37. The corn futures moved lower in light activity. December futures were 3 cents lower Tuesday. The Dow Jones Index is 35 points higher with the Nasdaq up 32 points.

LIVE CATTLE

Triple-digit gains held in all but expiring October contract months Tuesday as traders prepared for month end ($0.92 to $2.22 Higher). Strong underlying support quickly moved into the December and February contract months with each of the contracts moving $2 per cwt higher through the Tuesday session. December contracts will now take over as spot month futures contracts with prices quickly moving above $125 per cwt. This will likely put even more focus on both cash and beef values through the end of the week. Buyer support is still partially focused on the fundamental support seen in last week's cash market trade. But the expectation that additional strong demand over the coming months will draw additional buyer interest back into the market. Beef cut-outs: higher, $0.26 higher (select, $193.90) and up $3.12 (choice, $206.44) with moderate demand and heavy offerings (64 loads of choice cuts, 45 loads of select cuts, 21 loads of trimmings, 19 loads of coarse grinds).

WEDNESDAY'S CASH CATTLE CALL:

Steady to $2 Higher. Strong futures trade support through most of the trading session Tuesday is putting emphasis on additional cash market support. However, the overall lack of interest by packers or feeders in establishing active bids or asking prices will likely push cash cattle trade to the second half of the week. This may push trade to Thursday and potentially late Friday once again.

FEEDER CATTLE:

Feeder cattle futures closed following strong triple-digit gains in most contracts ($0.55 to $2.22 Higher) following the strong two day swing seen across all cattle markets. November and January futures led the complex higher with prices nearing the $160 per cwt level. Trade earlier in the session moved price levels above this $160 per cwt market price, but the inability to spark additional carry over buying activity at the end of the session pulled contracts off of session highs. Even though the market posted aggressive gains, end of month position taking was seen in the last hour of trade. This market shift could allow for additional market volatility when traders return to the complex Wednesday with a fresh month ahead of them. CME cash feeder index for 10/30 is $156.92 up $1.99.

LEAN HOGS:

Sharp gains quickly developed in nearby lean hog futures trade in the last hour of trade Tuesday following the support seen through most of the session and spill over buying coming from the cattle complex. Despite lackluster interest in deferred futures, most contracts closed higher (steady to $2.85 Higher). December futures closed at $68 per cwt following a $2.85 per cwt rally, while February futures rallied nearly $2 per cwt higher in late day trade, moving to $73 per cwt. It is uncertain just how much momentum will be carried over into the month of November, but the overall market continues to carry a bullish tone. Carcass values trickled slightly lower following choppy moves through all primal markets. Marginal gains in Loins, Picnics and Bellies, were offset by similar losses in Butts, Ribs, and Ham cuts. Pork cut-out: $78.54 down $0.03. CME cash lean index for 10/27: $69.09, up $0.15. DTN Projected lean index for 10/30 $69.08 down $0.01.

WEDNESDAY'S CASH HOG CALL:

Steady to $1 Lower. Despite the strong futures market support early in the week through livestock futures, cash buying activity is expected to start out steady to $1 per cwt lower as traders continue to focus on the readily available access to hogs. Even though packers continue to aggressively push plant speeds, the limited support through the end of the month of October may continue to curb early buyer incentives. Wednesday's slaughter is expected at 465,000 head with an expected Saturday run at 170,000 head.