Markets are understood looking backwards but must be traded looking forwards. — Larry Williams
I’ve received many inquiries over the past couple of weeks in regards to the feeder cattle market. The recent price activity has surprised many producers and analysts, including myself. After a rather bearish outlook earlier in winter, the feeder cattle market has traded sharply higher since early April. I thought this would be a good time to review the price activity earlier in winter and spring and then discuss the expected market direction for the fall period.
Since January, the April live cattle futures were trading at sharp discount to the cash trade causing feedlot operators to market fed cattle very aggressively. Weekly beef production was expected to experience sharp year-over-year increases, especially from April through August which kept the futures market under pressure. Feedlot operators were unable to bid up the feeder market because they couldn’t lock in a profit in the deferred positions. At the same time, feedlot operators continued to push cattle forward and marketing weights dropped below year-ago levels. The cash market for live cattle started to percolate higher in March but the futures remained at a sharp discount. The rally in the cash market was viewed as temporary or seasonal and ideas were the trade would drop to the futures level during the April delivery period. This caused feedlots to be extra aggressive on marketings. Operations on both sides of the border became extremely current to the point where the weekly slaughter pace started to ease. Instead of having a year-over-year increase of nearly 30,000 head per week, the weekly slaughter was only up 5,000 head per week from last year and actual weekly beef production was similar to year-ago levels because the marketing weights were lower. Then on the weekend of April 29, a severe snowstorm in the U.S. southern plains along with excessive moisture in the Midwest made roads impassable in many counties. Packers had to bid up to cover their nearby requirements. The market environment was like a brewing volcano with the late-spring snowstorm being the trigger that caused the eruption. Alberta fed cattle prices reached up to $197 during the first week of May only to slide back to the mid-$180s during the following week.
The feeder market was relatively flat from January through March. Prices were slightly higher in April as feedlots had experienced a prolonged period of very good margins. The feeder market only surged higher in late April and early May as fed cattle prices reached near historical highs. Now producers are asking: “Where do we go from here?”
At the time of writing this article, 800-pound steers were priced around $215. The fed cattle break-even price for October or early November is about $163 for these steers. It appears that feedlots have bid up the price of feeder cattle until margins are quite narrow. The fed cattle price projection for September through November is in the range of $155 to $165 so feedlot margins run the risk of moving into negative territory in the fall period if feeder cattle prices continue to strengthen. The December live cattle futures are currently trading at US$118 which is about C$161. Basis levels have been abnormally strong and there is no reason to think this will change for the remainder of the year. Feeder cattle prices have likely run their course for the time being. We would need to see a significant change in live cattle prices to justify higher feeder market.
Choice wholesale beef prices reached up to US$247 in mid-May while select product was quoted at US$225. The wide spread between choice and select reflects the number of green cattle coming on the market. If wholesale prices can stay at the higher levels, the fed cattle market will also be well supported at the current levels. However, U.S. third quarter beef production is projected to reach 6.8 billion pounds, 300 million pounds higher than last year. Keep in mind that September and October are usually periods of seasonal low demand. Producers should be cautious for the third quarter. We’ve seen in past years that large swings to the upside can be followed with sharp swings to the downside.
This recent rally in the market is a prime opportunity to buy some put options on the live and feeder cattle futures for fall marketings. The nearby market has incorporated a risk premium due to the current environment and this has pulled up the deferred futures for both live and feeder cattle. I think it’s prudent for producers to watch weekly beef production numbers to see if supplies increase as expected. Secondly, watch wholesale prices to confirm the consumer demand is stepping forward at the higher levels. Retail prices have been grinding lower so retailers will increase prices moving forward, but this takes time.