Live Steer Vs Fresh Retail Beef Prices
When yous ponder the current spread between live fed cattle prices and retail beef prices — extraordinarily wide for more than than a twelvemonth and tape-large in June — two cautions come to mind.
First, this spread is different from the Farmers Share of the Retail Dollar (FS) calculated by USDA. And neither statistic says anything virtually producer or retailer fortunes.
Second, history suggests live cattle prices are atypically low relative to retail beefiness prices, meaning there could be a pregnant bounce that could wreck lots of bottom lines if hedged at current prices without protection.
"In the last xxx years, this is the just fourth dimension this has ever happened when there hasn't been a major financial recession," says Brett Crosby, president of Custom Ag Solutions (CAS), Cowley, Wyo.
Crosby is referring to retail prices irresolute so slowly relative to fed cattle prices — over an extended period of fourth dimension — that they near appear to run counter to them (Figure ane). The final time such an anomaly occurred was in the 2008 time frame as the nation dealt with the Great Recession.
"In full general, information technology reflects a lot of pessimism in the market place, every bit far equally demand goes. Cattle prices are dropping faster than retail prices because buyers don't see the demand for animals that we've had," Crosby explains. "Historically, we've seen situations like this concluding upwards to a couple of years. We're already going into the 2nd year of this i."
Price spreads non turn a profit proxies
Brenda Boetel, an agricultural marketing specialist at the University of Wisconsin-River Falls, offers perspective on the current magnitude in an October issue of the Livestock Marketing Data Center's (LMIC) In the Cattle Markets.
"Since 2010, average retail beef prices increased from $4.173 per pound in Jan 2010 to $6.412 in May 2015, a 53.65% increment," Boetel explains. "Live Kansas cattle prices increased from $84.x per cwt in Jan 2010 to a loftier of $172.94 in Nov 2014, a 105.64% increase. Since their respective highs, retail beef prices declined viii% to $5.915 per pound, whereas alive Kansas cattle prices have declined 38.2% to $106.89 per cwt."
There are lots of reasons that retail prices are slow to change in relation to cattle prices — both going upward and coming down.
"The cost outcome is more muted the further away you go from the raw product," says Glynn Tonsor, agricultural economist at Kansas State Academy. The farther removed the final consumer production is from the raw product, the less effect on the toll of the raw production.
For that matter — though it's incommunicable to calculate — given the fed cattle transactions that prevarication outside of mandatory price reporting, Tonsor suspects the ultimate greenbacks toll paid for fed cattle is higher than that depicted by the Five Area weighted live price, so the gap is narrower to start with.
Boetel explains that the alive-to-retail price spread includes ii other spreads: the live-to-cutout price spread and the cutout-to-retail price spread.
"The live-to-cutout price spread assumes a 63% dressing percent, and shows the difference in price paid for a steer and the wholesale value of beef plus the drop value," Boetel explains. "Assuming an average live weight of i,300 pounds, the alive-to-cutout spread was at a high of $439.thirty per head in June 2016. Information technology has averaged $270.80 per cwt and so far this year, upward from an boilerplate of $173.sixty over 2010 to 2014, and an average of $198.70 in 2015."
Boetel is quick to emphasize that the spread is not processor turn a profit.
"This spread represents a gross processing margin and does not business relationship for the processor's stock-still and variable costs, including labor, energy, etc.," Boetel says. "If 1 assumes a rough manufacture average of $165-per-head costs — they vary significantly from found to establish — then one can run across that although processors are doing quite well this yr, in 2014 they would accept averaged profits of only $1 per head."
Similarly, the cutout-to-retail price spread is not retailer turn a profit.
"The divergence between the wholesale value of the beef sold by packers and the retail value covers the retail industry's costs to marketplace beef to consumers," Boetel explains. "Once more, one cannot assume these are profits, as fixed and variable costs such every bit trucking and energy take not been accounted for."
She notes that simply 50% of the cost of retail beef actually comes from the toll of the wholesale beef, indicating considerable amounts of marketing services are added between wholesale and retail levels. "Another manner to await at this level between retail and wholesale is if wholesale beefiness prices decreased fifty%, retail prices could but hypothetically decrease 25%, keeping all else equal."
However, the cutout-to-retail spread does help illustrate the current disparity between retail and live prices. Co-ordinate to Boetel, the cutout-to-retail toll spread in June of this year was $1,960 per head, compared to the average of $1,303 over 2010 to 2014. Information technology was $i,607 in 2015; it is $1,737 so far this year.
"With the recent turn down in boxed beef cutout, processor margins will likely decline faster than retail margins, as retail prices tend to be stickier due to the consumer's general dislike of price variability," Boetel says. "Decreasing processor margins does non necessarily hateful increased cattle feeder profits, as the profits and losses may exist distributed among retailers."
Sooner or later, Crosby says alive cattle prices are expected to bounce back toward the celebrated regression line.
"Information technology could last another month, or another year," Crosby says. "When the market corrects, it tin can right quickly. So, if y'all're hedged at these levels, you need to take some protection in case the market bounces dorsum rapidly."
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Source: https://www.beefmagazine.com/livestock/beware-big-spread-fed-cattle-and-retail-beef
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