Lower live cattle futures prices have been discouraging cattle owners from locking in prices using forward contracts or futures, said Matthew Diersen, risk and business management specialist at South Dakota State University in a Livestock Marketing Information Center letter called In The Cattle Markets.
Pasture forage or water can run low. Other feed supplies may run low. Target weights may be getting close.
Laying out a marketing plan, even if it is rough guides when to take actions to selectively hedge risk, Diersen said. Opportunities may not present themselves, meaning it can get too late.
2023 VOLATILITY CHANGES
For much of 2023 cattle-market volatility was very low, he said. Typically, it will be 10-15% for live and feeder cattle. If volatility is low compared to this range, then options will look favorable to a buyer, and Livestock Risk Protection premiums will look low.
When cash and futures prices began to fall in late October the volatility began to increase from 12% to 16% for live cattle and from 13% to 19% for feeder cattle, Diersen said. Recently, the implied volatility was above 19% for nearby live cattle contracts, with a little inversion or drop-off in the level for more deferred months.
For feeder cattle, the volatility was above 21% for most months and strike prices, he said. Thus, option and insurance premiums are higher for a given level of coverage.
When coupled with lower price levels, the effective floor price from put options and LRP would be substantially lower than a month or two ago, Diersen said. The lack of any skew patterns suggests no obvious ways around the situation.
If a floor must be bought, backing off the level is about the only recourse in the short run. Otherwise, one waits.
HEDGERS DISCOURAGED
The lower prices have been discouraging hedgers from locking in prices using forward contracts or futures, Diersen said. After a brief spike in new signings in late September the weekly volume of new contracts has fallen.
However, for much of October and November the cumulative signings exceeded 1.0 million head, he said. This was after a long stretch below 1.0 million for the past year. Historically, the cumulative total tends to be around 1.5 million head.
Lower prices likely discouraged feedlots from locking in unprofitable prices, Diersen said. Packers seemed to have filled their needs and then backed off.
That may leave them with relatively low levels committed for much of 2024, he said. Large feedlots locking in fewer head also may explain some of the decline.
There has been a little decline in recent months in the small (non-reportable) short open interest, which may indicate smaller feedlots are not excited to hedge at these levels.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $169.00 per cwt to $171.51, compared with last week’s range of $165.82 to $173.08 per cwt. FOB dressed steers, and heifers went for $267.90 per cwt to $269.70, compared with $268.50 to $27.
The USDA choice cutout Wednesday was up $0.30 per cwt at $289.13 while select was off $1.56 at $261.60. The choice/select spread widened to $27.53 from $25.67 with 96 loads of fabricated product and 28 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.28 to $1.38 a bushel over the Mar corn contract, which settled at $4.69 3/4 a bushel, down $0.03.
No delivery intentions were posted for Dec live cattle Wednesday.
The CME Feeder Cattle Index for the seven days ended Tuesday was $220.31 per cwt, up $0.40. This compares with Wednesday’s Jan contract settlement of $224.05, up $2.15.