Feeder cattle futures prices rose over the last few days, prompting some technicians to say nearby contracts are becoming overbought. Any setback, however, likely will be minimized by tight cash supplies for the time being, but will fall to rising supplies later.
The CME Feeder Cattle Index, a weighted average price of feeder cattle auctions around the country and the base against which futures contracts are settled at expiration, has risen steadily since its latest dip on May 26. During this time, the Index price rose to $225.93 per cwt for the seven days ended Friday from $222.11, a gain of $3.82, or 1.72%, in just eight trading days.
The futures market anticipates a downturn and has been running at a discount to the cash market for some time. Monday, the Index declined to $225.05 while the Aug contract rose to reach its highest point since Jan. 8, closing the gap between cash and futures.
The latest Index dip may be the start of a small setback. The cash feeder cattle market is expected to remain firm for the next several weeks before finding some upside strength in July and August. Support likely will come from continued tight supplies.
BIOLOGY A CONSTRAINT ON SUPPLIES
While cattle producers appear to be holding heifers back from the feedlots for breeding, it takes almost three years before a fed animal is slaughtered from the decision to hold a heifer back: a heifer will have her first calf at about two years of age, and it takes another 15 months or so for the calf to reach the packing plant, depending on the season.
If those calves are able to spend a good portion of their lives on pasture before going to the feedlot, it may take longer since calves grow more slowly on grass than on grain-based feedlot diets.
HERD REBUILDING APPEARS AGGRESSIVE
However, when calves from those first-calf heifers begin hitting the market, supplies likely will be noticeably larger and prices significantly lower, because efforts to rebuild the herd from a 63-year low appear aggressive.
Federally inspected 2015 heifer slaughter through the middle of May is down 7.6% from the same period last year and down 13.8% from the same period in 2013.
Herd rebuilding seems less intense in the Southeast than in places like Missouri or Kansas.
In addition to increased heifer retention and lower slaughter, 2015 cow slaughter through mid-May is down 15.6% from a year earlier and 25.5% below the same period of 2013.
That sets up a scenario where feeder cattle prices are liable to decline sharply once the supply increases because buyers know supplies are liable to only get larger with each week and month. Futures traders expect this pressure on prices this year and are trying to trade lower.
In the short run, however, the effort to take feeder cattle futures lower is being thwarted by continued tight supplies.
CASH FED CATTLE MARKETS QUIET
No trade was reported in cash fed cattle markets through Tuesday this week. Prices last week ranged from $155 per cwt on a live basis up to $158. Most sellers stuck with their $163 asking price.
Dressed-basis action also was limited with scattered trading from $246 to $260, versus $252 to $253 the previous week.
Beef prices Tuesday were sharply higher, with the USDA choice cutout at $247.20 per cwt, up $3.09, and the select cutout at $240.75, up $4.44. Volume was moderate with 99 loads of fabricated product sold into the spot market.
The CME Feeder Cattle Index for the seven days ended Monday was $225.05 per cwt, down $0.91, and much closer to the Aug settlement.