Fed cattle markets were once again slow to develop. As of press time, packers were offering $121 while feeders were holding out for $124 in the North and $125 in the South. It was once again a typical packer feeder standoff when fed supplies are large. USDA’s Thursday afternoon report showed only 1,994 head traded for an average of $124.
The winter months are typically our slowest demand time of the year. Packers have lowered slaughter levels to maintain wholesale beef values. Packers were expected to process 608,000 head for the week. The packer margin index showed packers earning $76 per head. Carcass weights are running 15 pounds lower than year-ago levels.
Boxed beef values have been stuck in the $117 range for Choice and $112 for Select; there is not a lot of spread between the two grades of beef. Beef volume has also been quite low. However, retailers are still making a good margin and promoting beef in their weekly ads.
Cassi Fish at Consolidated Beef Producers said, “Packers are quite aware of the issues with February kills and plan accordingly, adept at managing the slower beef demand and tighter supplies. Last year, the FI slaughter was sub-615K until April. This year is expected to see slaughter edge up in second half March as beef demand increases and the cutout seasonally rises, if cattle availability allows.”
Futures markets have been steady for most of the week. It appears that the trend is still higher. The February contract was at $126.30 and the April contract was at $126.82 as of last Thursday. Then the deferred contracts go downhill from there, moving into summer supply challenges. Cattle feeders will buy replacement cattle according to the deferred fed contracts. It’s risk management.
Andy Gottschalk at HedgersEdge said in his recent outlook, “Front-end cattle supplies project to remain above year-ago levels into July… While adverse winter feeding conditions will support fed cattle prices near term, these conditions will also defer marketing dates for many cattle currently on feed. Adverse feeding condition can mitigate the impact of larger supplies near term. However, it does not eliminate these supplies. The only way to eliminate these supplies is by increasing weekly slaughter. As such marketings will be deferred for some cattle into the late-spring and summer period. The boogie man playing the ‘pay me now or pay me later’ game is then forced to accept the deferred payment option.”
Feeder cattle futures were still in a decline with March at $143.25 and April trading $1.50 higher at $144.85. However, looking into the fall deferred contracts, starting in August, all contracts are trading at $150 or higher. If you’re inclined to do some risk management, the fall contracts present a good put option strategy. The latest CME feeder cattle index was at $141.53, down from last week’s price of $142.99
Matthew A. Diersen, professor and extension specialist at the Department of Economics, South Dakota State University, points out: “What is the current volatility level? Various brokerage and trading platforms provide a calculation of current and implied volatility, but it helps to know what they use. Consider the August 2019 Feeder Cattle contract. This contract and its options will trade until Aug. 29, 2019. The August futures contract has been trading slightly above $148 per cwt. Thus, a put option with a 148-strike price would be at the money, and was recently trading at $5 per cwt. There are about 210 days until expiration and interest rates are about 2 percent. Using Black’s option pricing model, the volatility implied by these parameters is 12 percent, the lowest since 2014 for this time of year. If the volatility were high (low), at-the-money options would be trading at $10 per cwt ($4 per cwt). The low volatility is prevalent across months and for the live cattle contracts also. Thus, market uncertainty is not driving up the cost to lay off price risk when using options.”
We do have risk in the forecast. Gottschalk commented that “with the outrageous political side-show in this country, accompanied by slowing worldwide growth (lead by China’s slowdown) there is a mounting economic risk. This threatens the stellar total demand benefiting beef during 2018. Therein lies the greatest market risk.” He also says that the consumer is final arbitrator of the price you ultimately receive. “How important is the U.S. consumer? It would require an 11 percent annual increase in U.S. beef exports to offset a 1 percent decline in domestic beef demand.”
Most of the surveyed feeder auctions saw larger sales offerings and prices were mixed but more up than down. Lot size—rather than cattle details—seems to have more and more of a factor on prices in some areas. Buyers want big lots of consistent cattle to feed, especially as winter weather makes pen conditions iffy.
Medium and large #1 steers weighing between 700-800 lbs. still seem mostly in the $140s, but the top end of the range is extending into the $160s.
Colorado: Sales volumes were up at the Winter Livestock auction in La Junta. Feeder steers were mostly steady with the exception of light 5-weights and heavy 6-weights, which were both up $3-5. Light heifers were steady to up $2. Yearlings were steady to up $2-5 on loads of fancy or thin-fleshed steers. Benchmark steers ranged from $137-153.
Iowa: The Bloomfield feeder cattle auction sold half again as many cattle last week compared to the week before. Steers were steady save for 5- and 6-weights, which were up $2-5, while light heifers were up $2-3 and heifers over 550 lbs. were down $2. Demand was called good. Number 1, 7-weight yearling steers ranged from $145-155.
Kansas: The Farmers and Ranchers Livestock Commission had a special weaned calf sale where all calves were weaned at least 30 days and had at least one round of shots in them. Heifers were guaranteed open. No price trends were given for the special sale; trade and demand were described as moderate. Benchmark steers ranged from $150-157.25.
Missouri: The Joplin Regional Stockyards sold almost 1,000 head more feeders last week compared to the week before. Light steers were up $3-7, midweight steers were steady to up $3, and steers over 800 lbs. were called steady. Heifers were steady except for yearling 7-weights, which were steady to up $5. Benchmark steers ranged from $136 for a small lot of fleshy yearlings to $152.25 for a large lot of light, standard-fleshed yearlings.
Nebraska: The Huss Platte Valley Auction sold half the number of cattle last week as it did the week before. Despite that, feeder cattle sold steady on good demand. Cold temperatures were credited for the thin flesh seen on much of the offering. Benchmark steers sold between $142.25-157.
New Mexico: The volume was steady at the Clovis Livestock Auction, put the prices were higher. Calves were up $4-5 with instances of $8 higher. Trade was called very active on very good demand. Even the limited offering of Holstein steers saw prices up $6-10. Several small lots of benchmark steers ranged from $133-140.
Oklahoma: The National Stockyards sold over 13,000 head of cattle last week, but over 2,000 compared to the prior week. Mid-weight steers and heifers were steady to up $2. Heavier animals sold down $1-3. Steer calves were steady to $2 lower while heifer calves were the opposite. Prices on benchmark steers seemed to vary more by the size of the lot rather than the details of the #1, 7-weight steers in the lot. Large lots ranged from $137-149 while small lots ranged from $134-137.50.
South Dakota: The volumes were down and the prices were mixed at the Hub City Livestock Auction last week. Most steers were steady to down $2, with the exception of 8-weights, which were the opposite. Heifers were steady to down $4. Bidder activity was called moderate with the weather being blamed for dampening the activity. Benchmark steers ranged from $139.50-157.25.
Wyoming: The Torrington Livestock Commission sold over 1,500 head more cattle last week than the week before. Steer calves were called steady to weak, while steers over 600 lbs. were up $5-11. Heifers under 500 lbs. were uneven, but over that they were steady to up $7. Benchmark steers ranged from $147-163.50, with the top being set by a large lot of “fancy” yearlings. — Pete Crow, WLJ publisher, and Kerry Halladay, WLJ editor
