CHICAGO (Reuters) - Tight credit and high wheat prices are preventing ranchers and farmers from placing their cattle at feedlots and from grazing them on wheat pastures, which could continue to weaken prices for the animals.
The credit crisis has made it tough for ranchers and farmers to place their “feeder” cattle at feedlots to be fattened on corn and other feed before slaughter, with deposit requirements doubling in some cases to 40 percent of the cost.
Feeder cattle weighing at least 800 pounds are usually sent to feedlots to be bulked up, while those weighing less normally graze on wheat pastures to gain weight on a lower-cost budget.
As a result, producers of cows and calves are finding less demand for feeder cattle, which is weighing on prices as supplies build. There has also been reduced interest from feedlots, which also need bank loans to run their operations.
“Bankers are showing reluctance to finance cattle that in the end have shown losses. With credit tightening, they have backed off,” said Lane Broadbent, livestock analyst at KIS/OKC Trading in Oklahoma City, Oklahoma, a center for livestock auctions.
At the Oklahoma City feeder auction on Monday, feeder steers and heifers under 800 lbs sold $2 to $3 per cwt lower than the previous week and those over 800 lbs were $4 to $5 lower. Steer and heifer calves sold $4 lower, with instances of $8 lower.
Chicago Mercantile Exchange feeder cattle futures for delivery from October through January fell to contract lows in electronic trading on Monday before bouncing back on Tuesday. Futures prices fell again on Wednesday.
“We have been concerned and cautious here for a few months just because of the input costs that all of our customers have seen increase dramatically,” said Robert York, president of National Livestock Credit Corporation. “The cattle feeders have been losing money for several months now.
National Livestock Credit Corp, located in Oklahoma City, finances the cattle industry, all the way from cow-calf operations to feedlots.
“But with the current situation in the financial markets, everybody is definitely taking a stance that they (lenders) are going to be a lot more cautious,” York added.
York noted that although longer-term financing is being interrupted, short-term financing has been continuing.
“We’re a small institution and I think that in some of the bigger institutions there may be more emotion in some of these credit decisions because of other things the banks have to contend with other than their agricultural clients,” he said.
Broadbent said feeder cattle prices had fallen $15 per cwt in the last four to five months. He noted that feeders weighing 800-850 lbs and graded Medium and Large 1 traded at $100.80 at the closely watched Oklahoma City feeder auction, down from $115.25 per cwt last year at this time.
Light-weight feeders, weighing 500-550 lbs, were trading at $110.15, down from $121.20 per cwt last year, he said.
“It’s (financing) been a lot of trouble,” said Jim Sauter, CME feeder cattle futures trader. “I know one individual who feeds (cattle at feedlots) regularly told me he used to be able to put 20 percent down for feeders and now they want him to put down 40 percent — and he’s a good customer.
“It’s dragging prices down and left a lot of players out of the market on the sidelines. So it’s also taking some volume and liquidity away from the pit,” said Sauter.
Apart from the credit crunch, ranchers and farmers are finding it difficult to graze their cattle on wheat pastures.
Chicago Board of Trade wheat futures hit a record high of $13.34-1/2 per bushel on February 27, and even though they were trading below $7 on Wednesday, prices are more than double those at the end of 2005 of $3.39-1/4.
CBOT corn futures rose to a record high of $7.65 on June 27, but have fallen to below $5, which is still more than double the $2.15-3/4 at the end of 2005.
“A lot of these farmers are not wanting to graze their wheat as hard because they see these wheat prices high. When you put cattle on wheat it will damage the wheat three to five bushels or even seven bushels an acre, and at $8 wheat they don’t want to put cattle on wheat,” Broadbent said.
But with the drop in prices for light-weight feeder cattle, traders were expecting a pickup in demand.
“We’re finally getting these (light-weight) feeders down to where they are getting to be property to own. These light calves, 300 to 500 lb steers and heifers, have been the best value they have had in the last three to four years,” Broadbent said.
It may be some time before the economy and financing improve enough to increase demand for all types of feeders.
Demand for relatively high-priced beef tends to wane in tough economic times as consumers cut back on spending.
Reporting by Jerry Bieszk, editing by Matthew Lewis