September 28, 2013
Expected tight calf supplies, underscored by the most recent Cattle on Feed report, continued to spark calf and feeder cattle markets last week.
Feeder cattle traded firm to $3/cwt. higher, according to the Agricultural Marketing Service (AMS). Analysts there note that the CME Feeder Cattle Index reached a record-high last week, settling on Thursday at $159.36. The most recent record-high was 157.44 in February 2012.
AMS analysts explain the index is a rolling seven-day average price of federal and state-reported feeder steers (650-849 lbs.) marketed in 12 Central states.
“These prices are absolutely unprecedented and aided by declining numbers of true yearlings and outstanding demand, especially north of I-70 where corn producing farmer-feeders have been active participants,” AMS analysts say.
Week-to-week, Feeder Cattle futures were up an average of $3.
Steamy as feeder prices were, the real story last week may have been the contra-seasonal price rally in the calf market. For the week, calves sold steady to $5/cwt. higher after uneven trade in recent weeks. What’s more, it was common to see price increases of $10-$20 for lightweights in the Central U.S.
“Despite volatile fall weather temperatures and a heavy influence of high-risk, unweaned new-crop calves in the offering, calf values increased across the country as wheat grazing demand in the Southern Plains and winter backgrounders farther north entered the market,” AMS analysts say.
Added fuel to the fire seems to be coming from the return of farmer-feeders who may be electing to market some of this year’s corn crop through cattle rather than settle for significantly lower corn prices than the last couple of years.
“A combination of factors, including lower grain prices, positive expectations of winter forage, reduced feeder cattle supply, a jump in live cattle futures prices, and increased demand from farmer-feeders have ignited the contra-seasonal cash price improvement for calves and feeder cattle,” says Andrew P. Griffith, University of Tennessee agricultural economist, in his Friday market comments. “Farmer-feeders had little to no interest last year in purchasing cattle to place on feed, because they either had no corn to feed or they were selling corn at record-high prices. However, this year with corn prices plunging and cattle prices soaring, many farmer feeders have an incentive to forgo the cash corn market and market heir grain through cattle.”
Despite adequate beef supplies in the short-term, the snug cattle supply and looming declines in beef production lent added support to the market last week.
“It’s plain that cattle feeders are starting to turn a meager profit on a few of their better performing pens, or cattle they were able to get bought worth the money,” AMS analysts say. “By Friday afternoon, Southern feed yards were passing $2 higher bids of $126/cwt. as the entire cattle complex seems to be headed in the right direction.”
By the end of the business week, cash fed cattle trade finally started opening up in Nebraska and the western Corn Belt with dressed prices reported at $2-$4 higher than the previous week, bringing $198-$200/cwt.
Wholesale beef values ended the week about even, though Choice cutout values declined 97¢ Friday afternoon and Select cutouts were 90¢ lower.
Live Cattle futures closed an average of $2.17 higher week-to-week in the front five contracts and an average of $1.28 higher across the rest of the board.
“The current cash market for calves is extremely appealing to sellers, but there is a good opportunity to increase net returns to the cattle herd by weaning, vaccinating, and preconditioning those spring-born calves and then marketing them next spring,” Griffith says. “This production and marketing method should be even more appealing for cow-calf producers with a lot of standing forage as forage can provide a relatively inexpensive cost of gain. For stocker producers, the risk is much the same as in previous years…
There will be a larger upfront cost as calf prices are strong for the fall time period, but prices at spring marketing are also expected to be strong.”
In fact, the Livestock Marketing Information Center (LMIC) projects an average annual price range of $183-$187/cwt. for 500-600-lb. steer calves in 2014 and $186-$196 in 2015. Glynn Tonsor, Kansas State University (KSU) agricultural economist, shared LMIC outlook prices during this week’s KSU Beef Stocker Field Day.
For 2014 and 2015, LMIC projects the annual price range for 700-800-lb. steers at $159-$162/cwt. and $163-$171, respectively. Prices for fed steers during the same periods are projected at $130-$135/cwt. and $134-$141.
Moreover, Matthew A. Diersen, South Dakota State University agricultural economist, explains in last week’s In the Cattle Markets that current implied price volatility levels of forward-looking futures and options markets are low.
“Implied volatility is the industry's best guess at how much a futures price will fluctuate between now and when the contract expires,” Diersen explains. “That volatility does not depend on how much cash prices have moved in the recent past. That volatility is the one that producers are worried about. They want to know what will happen to feeder cattle prices by January or March of 2014. Implied volatility for those months has been under 9% in recent weeks.”
He adds that implied volatility for feeder cattle in recent years has typically been about 15%. Likewise, he says, implied volatility for Live Cattle is atypically low.
“Feeder cattle prices this fall are historically high. In contrast, livestock insurance premiums and options premiums are historically low,” Diersen says. “At-the-money options for deferred months are trading for less than what out-of-the-money options for nearby months were trading for last year. The implied volatility drives the cost the industry charges to transfer risk. At low volatility levels, simple marketing strategies such as buying put options on feeder cattle look attractive … The bottom line is that if these volatility levels hold, it will be very inexpensive to transfer cattle price risk using livestock insurance or using options (of any kind). The lower cost of coverage could show up in higher prices bid for calves this fall.”
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