The March feeder-cattle futures price has returned to that of Dec. 12. In the wake of the second North American case of bovine spongiform encephalopathy (BSE), and most foreign markets closed to U.S. beef, I never believed this would happen.
May feeder-cattle futures are still down $4/cwt. from mid December. Feeder-cattle futures for the past six months are still down $4/cwt. from mid December. Figures 1 and 2 show the average price for all contract months in 2004 was $90.34 in December 2003, while the average for all contracts on March 19 was $3.09/cwt. lower.
This suggests ranchers need not only get a handle on where prices are, but where prices are going.
In last month's column, I detailed my planning-price, market-tracking system and focused on slaughter-cattle planning prices. This month, I'll focus on feeder-cattle prices.
The feeder-cattle planning price, market-tracking system centers around the format in Figure 3 on page 12. Each Wednesday, ranchers should collect that day's futures prices, and use them to generate a new planning prices table.
I also encourage ranchers to compare the new planning prices to those of the week before. If you can explain the price variation, go about your business. If you can't, take time to search the Internet or ask someone to explain it to you. Begin by contacting your state's Extension marketing specialist.
The “market basis” column in Figure 3 is the five-year-average basis data for the central U.S. Basis is the cash price minus the nearby futures price. Note that for all but one month, local cash exceeded the futures price.
The pre-crisis basis column is the most recent five-year average basis for Kansas, as reported by Kansas State University's Jim Mintert. I use Kansas basis as the foundation for my Central Plains planning prices.
You can use these Kansas basis values or replace them with your local basis data. Your Extension marketing specialist can provide you with specific basis data for your state.
I suggest the post-BSE basis will be $3.41 narrower than the pre-BSE basis, due to increased marketing costs in the post-BSE era. If you're uncomfortable with this wider basis, use the historical pre-BSE basis.
How are these planning prices calculated? It's simple. Take the $86.65 August futures price in Figure 3, add the August -$1.16 post-BSE basis, and you'll get the $85 August 2004 planning price posted in the table. Do this for each contract month in the table.
By averaging the all-futures prices in Figure 3, you'll get the $87.25 listed at the bottom of the first column. Average all the planning prices in the right-most column to get the annual planning price average listed at the bottom of the right-most column. Do this once/week focusing on Wednesday prices.
Continue going to the local sale barn to monitor prices. Add my 20-minute, weekly market price watching exercise and you'll gain insight into where post-BSE feeder-cattle prices are going. Understanding where prices are likely headed, and why, is the key to marketing in this post-BSE era.
Each month, I prepare a comprehensive set of futures-based planning prices, which I apply to alternative cattle production and marketing decisions. Let's summarize my March production/marketing simulations covering the marketing of 2003 calves.
My production/market simulations for placing 2003 feeders on feed, as of mid March, generated $72/head loss for feeding out 800-lb. feeder steers to 1,250 lbs. Even placing fall-born calf-feds on feed, as of mid-March, generated a $92/head loss. Finally, finishing yearling steers off grass in August 2004 generated a $26/head loss.
|Feeder Cattle Futures||Market Basis||Central Plains|
|23-March 2004||U.S.$||Pre-BSE||Post-BSE||Planning Prices|
|Dollar point year adj.= 0 Added basis = -$3.41|
All my simulations though, are based on commodity beef prices. Any money to be made with 2003 calves will have to come from value-added premiums. Commodity beef profits just aren't there.
Why then are cattle feeders bidding up feeders beyond projected breakevens? This is typical of the cattle-feeding sector in the cycle's rebuilding phase. With feeder cattle numbers short, the alternatives for feedlots are to overbid for them or shut down the feedlot.
In the last cycle, many feedlots opted to minimize losses by feeding cattle at a loss rather than shut down the facility. The thinking is that feeding for a loss is preferable. After all, fed prices might rise. Plus, reconstituting a trained workforce, once laid off, can be difficult.
Clearly, we're in that phase of the cycle where cow numbers and feeder calves are low, and beef cow producers are moving into the driver's seat. Here's why.
Let's review a theoretical cattle cycle, slaughter cycle and price cycle chart generated by a University of Wyoming graduate student (Figure 4).
I modified the year labels at the bottom of the chart to correspond to where I believe we are in the current cattle cycle. I view the 2004 to 2006 period as the post-BSE recovery years.
One immediate thought was that lower heifer prices, in response to the U.S. BSE case, would stimulate heifer retention. It's not clear if this is happening, but slaughter data indicates fewer cull cows are being harvested. USDA's July All-Cattle inventory will confirm if heifers are being retained. Both decreased cow culling and increased heifer retention are needed to expand the U.S. cattle herd.
Figure 4 suggests cattle numbers will rise from 2004 to 2009. As heifers are diverted to breeding, we'll first see feeder-cattle prices increase, peaking around 2007. As numbers continue to build beyond 2007, cattle prices will drop — perhaps dramatically.
Depressed prices in 2008 to 2010 are projected to lead to a substantial drop in cattle numbers. That would complete the current cattle cycle.
We're plowing new ground in this BSE saga. Your price-tracking system can help guide you through the next three years' marketings as this BSE saga unfolds.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].