Cash market up but futures lagging; cattle feeders making profits
May 31, 2017
If records are made to be broken, the cattle industry has done its job the past few years. After record highs in 2014 and a record crash in 2015-16, the industry now may be experiencing record spreads between the cash price and the futures price.
While the cash market has been unexpectedly on the rise, the futures market is a different story. According to Rabobank Finance's April report, this is caused in part by anxiety over a potential oversupply in the pipeline, as well as growing supplies of competing proteins.
"As a result, basis, the spread between cash price and futures has been exceptionally to record strong," the report said.
The strong basis encourages aggressive marketing of fat cattle, the news release stated.
“Domestic beef demand has been good with a solid economy and unseasonably warm late winter and spring enabling early season grilling. The real unexpected driver in the market has been robust beef exports.”
And then there is the volatility in the cattle contracts, which has been worse than he's ever seen in his 45-plus years in the cattle industry, said Mike Jorgensen, a representative for video sales company Big Blue Livestock and cow-calf rancher from Iowa.
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"About two weeks ago, October feeders had a $9 per hundred trade difference one day. They were up the limit and then closed down the limit. Nobody in this business has seen this kind of sustained erratic behavior," he said.
Jorgensen said volatility is caused by the fact that fund managers are controlling the contracts, and contracts are not aligned with the actual cattle industry any longer.
"True cattlemen that are raising the cattle are not using the futures anymore for a hedge because the market is controlled by fund managers," he said. "Those fund managers have unlimited funds to buy or control 2,000 or 3,000 contracts at a time."
Jorgensen said that, with so many contracts under their control, some fund managers can actually influence the futures market. Because they are constantly buying and selling, they need the market to keep moving up and down.
Aside from the wild fluctuations on the board, Jorgensen said the cash market has been trending upward probably in part because of cheap corn and because feeders were able to sell cattle for a profit throughout the spring.
"They are wanting to get their hands on some cattle for the fall, or get them contracted," he said.
Bryan Hanson, Fort Pierre (S.D.) Livestock owner, agreed, saying that earlier than normal sales of fat cattle — feeders selling cattle at 1,250 pounds rather than feeding to 1,400 pounds, for example — is helping encourage the market to continue to strengthen because it is keeping pounds off the market.
But Hanson said it isn't all roses and that he's hoping for better days ahead.
"We are still at nearly an all-time low in cattle numbers here in the U.S. for the last 50 or more years, with a growing population. Even the record high cattle prices of 2014 weren't high enough to keep up with inflation," he said.
Hanson's dad paid $3,500 for a new two-wheel drive pickup in the 1970s. "That same pickup today would be $35,000 to $40,000," he said, and then compared the cattle prices of then and now. "Back then calves were worth about 70 cents. Take that times 10 (like with the value of the pickup) and you get $7 feeder calves. We think we hit a homerun with $2.50 calves but in comparison to the cost of everything else we are still way behind."
Still, Hanson said the strengthening of the market was a pleasant surprise and he believes it is due to tight supplies, which he said forces the major packers, who often use captive supplies to stay out of the market when it is moving upward, to bid aggressively.
Optimism over planned beef exports to China also could be contributing to the market uptick, Hanson and Jorgensen said.
Both men caution the industry, though, to be logical about the potential for beef sales to that country.
"Their population might be huge, but it is a small percentage of their citizens who can afford beef," Hanson said. "Our best market is right here in the U.S. We don't have to export high-end meat."
One major reason for the recent market drop was imports from Brazil and other countries that supplant U.S. product and drive U.S. prices down, Hanson said.
Rabobank reported international beef companies reacted quickly to the higher cattle markets by increasing their imported supplies.
"Mexican cattle exports (into the U.S.) continue to outpace previous years on a month-by-month basis. This year we have seen the biggest volume of cattle exported to the U.S. since 2014, reaching 348,000 head YTD, a 36 percent increase compared to the same time last year. Beef exports to the U.S. continue to increase due to exchange rate effects, making exports a more attractive market. Beef exports to the U.S. are 37 percent higher YTD compared to same time last year," the Rabobank report said.
Both Hanson and Lauren Kaemingk, a partner in the Iowa-based financial planning firm Kooima & Kaemingk Commodities Inc., said they are hoping the market gets stronger through the fall.
Because feeders are making unexpected profits, they should be willing to pay for calves this fall, Kaemingk said. With the cattle market crashing throughout 2016, cattle feeders bought calves at rock bottom prices.
"If we can get through summer with a higher low than we were anticipating, that would translate into a good deal for the cow-calf producer," he said.
Kaemingk said he believes if the fed cattle cash price stays above $1.20 per pound, the calf market could land at around $1.70 for a 600 weight calf in mid-October.
Jorgensen is predicting a slightly lower fall market.
He's expecting 600-pound steer calves in load lots to be worth around $1.42 to $1.50 per pound by mid-November.
He said his company has helped arrange contracts for loads of calves at the following prices and weights for early November delivery:
• 615 pound steers at $1.61 per pound; heifers 15 cents less.
• 500 pound steers at $1.77 per pound
• 670 pound steers for $1.51; heifers 10 cents less weighing 660
The industry generally sees the year's low price in the fat cattle market between July and October because demand drops due to the hot weather and the number of cattle ready to sell tends to peak around that time period, Kaemingk said.
After a high thus far for 2017 of $1.45 about a month ago, the fed market has fallen back to around $1.32 currently, he said, which is normal around Memorial Day. "After they've filled their need for the holiday and it is too late to get the meat on the shelves, the market tends to soften."
Rabobank said several spring holidays usually help with beef demand, crediting Easter, Mother's Day, Memorial Day and Father's Day for the "heaviest beef movement of the year." The weather has been helping, too.
"Domestic beef demand has been good with a solid economy and unseasonably warm late winter and spring enabling early season grilling. The real unexpected driver in the market has been robust beef exports," the Rabobank report said.
Hanson said another thing that would help strengthen the market would be the re-implementation of country of origin labeling.
"The U.S. consumer should have the right to choose U.S. beef not only for food safety — with animal health issues in other countries — but also to support the USA," he said. "As the new president says, 'America first.' Consumers should have that choice." ❖
— Reach Stadheim at email@example.com.