Cash cattle markets are getting stronger and more folks are participating. I have been watching the Southern Plains cash marketing volume for a couple months and Texas has been consistently selling between 15 and 20 percent of their cattle on the cash market. Kansas has been doing the same.
Cattle feeders have watched the boxed beef cutout climb dramatically over the past few weeks and figure that it’s time for the packer to share some of their historic margins. Very little cash trade has taken place as of Thursday noon. Just 7,000 head traded between $108.50-113 live and $175 dressed. The Choice cutout was at $230 Thursday; the market is moving higher.
Last week the Texas Cash Pool, started by Consolidated Beef Producers, in Canyon, TX, sold around 1,200 head on a sealed bid and pushed the cash market up to $112.55, which is $2 higher than the week before. They also had five bids. So, you guys who are worried about the formula contracts and the cash basis for those contracts, you’ve got it.
We don’t need to pass any legislation to fix the cash market. The 50/14 plan was a pretty random idea to fix the price discovery element of the market. The cattle feeding industry in the Southern Plains is taking care of business themselves. I’m also certain the Texas Cattle Feeders Association and Kansas Livestock Association are riding shotgun on this effort.
The Cattle on Feed report showed that December placements were 1 percent over last year, which shouldn’t be a big deal after the fourth quarter lull where placements were 446,000 head fewer than a year ago. This has set up a spring and summer marketing window. The futures market is showing a good hedge right now even with $5 corn.
Winter grazing areas have been pretty lean this year. Oklahoma wheat grass was light on moisture most of the fall and California grazing is just getting started with recent heavy rains to the point of flooding. The light steer calf market has picked up a bit and the heavy feeders are picking up to hit the early summer window.
Deferred futures markets are pointing to a higher market from here on out. August futures are trading at $118.55; the same contract was $103 in October. The April contract is at $122.62. I would imagine that cattle feeders are looking for heavy cattle to place against those markets.
Even the February contract will entice some feeders to perhaps hold cattle a little longer in an attempt to capture additional premiums. We’re seeing the widest negative cash basis to the February contract ever.
HedgersEdge.com asks the question, “What impact might the weak basis have on the market? The tendency will be for producers to defer marketings (if possible) to capture the higher price implied by further out futures contracts. This action will serve to lend support to average cash market prices near term, while limiting potential price gains in the cash market during a later time period.”
HedgersEdge also estimates the number of fed cattle that have been on feed for 150 days or longer is 125 percent of the prior year in February, then goes down to 109 percent in April, May is at 89 percent, June 78 percent and July is at 67 percent. Feeders will be placing cattle according to these marketing windows, which suggests they will be wanting heavy feeder cattle.
HedgersEdge also said in their January Cattle Situation & Outlook report, “As front-end supplies decline into the summer, packers will be forced to give up some leverage. Given this week’s Choice beef cutout of $219.09, a return to producers capturing 58 percent of the Choice cutout value could support a cash market as high as $127 without any additional advance in the cutout.”
Jim Robb, former director of the Livestock Marketing Information Center, likes the way summer markets are setting up. He likes what the futures markets are telling us. Feeder cattle placed for the summer months have a profitable hedge built in even with $5 corn.
Deferred feeder cattle futures look interesting as well for summer grazing programs. The only wild card here is grass—which the long-range forecasts are telling us grass will be in short supply, especially in the West. So, again, pray for more snow and spring rains. — PETE CROW
