Clearly, the fed market’s decline over the past 22 months has been extremely painful for cattle feeders. While current losses are not as steep versus last year at this time, the market’s negative trend has kept closeouts in the red for an extended period of time. With that in mind, this week’s illustration takes a look at that potential influence on the feeder market.
This column has previously looked at the relationship between fed prices and the feeder market from a variety of perspectives. The most recent column featuring that topic noted, “Following steep losses in 2015, the expectation would be for the [fed-feeder] relationship to revert back to the longer-run relationship. That is, the feeder market would begin to soften with respect to the deferred fed market and rotate to a relationship that looks more like 2005-to-2013. But that hasn’t happened thus far in 2016. In fact, the pattern is remarkably similar to 2014 and 2015.”
This week’s illustration addresses that pattern from a different perspective – simply depicting the spread between feeder cattle and the deferred fed market over time. The graph reveals the widening spread and risk appetite among cattle feeders while the fed market was on the march to higher prices. It was that widening spread that contributed to last year’s sharp losses when the fed market reversed course into negative territory.
The difference between feeder and deferred fed futures prices bottomed out in early 2013; the 26-moving average settled around $7.50 per cwt at that time. Alternatively, the spread peaked in late 2014 at nearly $85 per cwt as feedyards were betting on the come for the fed market on the other side of purchasing those replacements.
Meanwhile, in light of the continued string of losses, the spread remains fairly sizeable with respect to longer-run historical norms – the current difference between deferred fed futures and the CME feeder cattle index is running around $30 per cwt.
What influence might continued losses have on the feeder market going in 2017? Will cattle feeders begin to ratchet back their risk appetite and implement softer bids for feeder cattle in coming months? Or have we established a new norm at the current level? Leave your thoughts in the comments section below.
Nevil Speer is based in Bowling Green, Ky., and serves as vice president of U.S. operations for AgriClear, Inc. – a wholly-owned subsidiary of TMX Group Limited. The views and opinions of the author expressed herein do not necessarily state or reflect those of the TMX Group Limited and Natural Gas Exchange Inc.
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