Given current conditions in cattle futures markets and feed production, cattle producers have some options to lock in margin, said Elliot Dennis, assistant professor and extension economist for the University of Nebraska-Lincoln, in a letter to Extension agents through the Livestock Marketing Information Center’s weekly In The Cattle Markets.
Feeder cattle futures price spreads across all months have recovered to near pre-COVID-19 levels, Dennis said. For the week of July 17, prices reached levels not seen since the beginning of March.
PASTURE CONDITIONS DECLINING
One the primary factors to watch are declining pasture conditions, Dennis said. The weekly range and pasture conditions rated “poor” and “very poor” has continued to rise since late May and early June.
As of the middle of July, pasture conditions were 15% worse than the five-year average and 20% worse than 2019, he said. Declining pasture conditions largely resulted from a drought progressing from the Southwest into the Plains, conditions largely consistent with the La Nina weather pattern.
Pasture conditions are worse in Texas, Colorado and New Mexico whereas most of the southern and western Corn Belt states have less than 10% of pasture conditions rated “poor” or “very-poor.”
If pasture conditions deteriorate, it could force producers to make earlier marketing decisions on weaned calves, he said.
Corn futures generally begin a seasonal price runup in the beginning to middle of July, often referred to as the “weather premium,” Dennis said. Although this year, the runup happened in the first few weeks of July as crop progress was behind and there were growing concerns that corn yield would be lower than expected.
For example, for the week endied July 1, 29% of corn was silking, and 3% was in the dough phase of development for the 18 reporting states, he said. These were well below the five-year average of 54% and 7%, respectively.
Fast forward one week after received additional moisture and moderating temperature, silking increased to 59% and dough to 9%, Dennis said. Add this to the corn in “good” or “excellent” condition at 69% compared to 57% a year ago and combined there appears little reason to believe that corn yields are affected by La Nina.
While it is true that different livestock futures contracts months can be more disconnected than grain futures contracts, the “offer curve” can still provide useful futures pricing signals, Dennis said. Density-curve estimations shows how (dis)similar prices are across years.
Futures contracts that are farther in the distance have more variable prices since there is more time before cattle are marketed and thus a higher probability supply and demand conditions will change.
As of July 20, futures prices across all CME contracts were at or near median levels, suggesting producers looking to protect some margin have similar opportunities as they had between 2011-2019, Dennis said.
In other words, currently the market is offering producers the option to lock in an average margin, he said. Remarkable, given the COVID-19 market volatility.
CATTLE, BEEF RECAP
Fed cattle trade was reported this week at $95 to $100 per cwt on a live basis, steady to up $1 from last week’s range. Dressed-basis trading was at $158 per cwt, up $1 to down $2.
The USDA choice cutout Thursday was up $1.11 per cwt at $202.26, while select was up $1.51 at $190.79. The choice/select spread narrowed to $11.47 from $11.87 with 93 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Wednesday was $137.96 per cwt, up $1.54. This compares with Thursday’s Aug contract settlement of $142.02, up $0.50.