Many Feeder Cattle Too High For Profitable Hedge

Despite Thursday’s reversal in live cattle futures and higher post-settlement trade, many feeder cattle prices are too high to put on feed and hedge a profit.

Compared with last week, Tuesday’s Oklahoma City Stockyards sale prices for feeder steers were $10 to $15 per cwt lower as the market followed the lead of the plunging futures market.  Feeder cattle futures locked down the daily $3-per-cwt limit for five straight trading days before expanded limits Thursday allowed trapped longs to exit and technical traders to take advantage of the market’s oversold condition.

Feeder steers yearlings at Oklahoma City weighing 700 to 800 pounds Tuesday brought $220 to $235 per cwt.  A quick calculation shows buyers should not have paid more than about $163 for these cattle.

And feeding Holstein steers is no better.  The Overland Stockyards had its monthly auction Thursday, and a reputation set of 325-pound steer calves coming in February went for $279 per cwt.  A similar quick calculation showed the buyer should not have paid more than $266.

 

FEEDLOTS NOW LOSING

 

The Sterling Beef Profit Tracker shows that feedlots lost money on the cattle they sent to slaughter last week, the second straight week of negative margins.  The latest calculations show feedlots lost an average of $33 a head last week as cash prices fell $5 per cwt.

Feeder steers in the country are working lower, although not at the pace of futures prices, which fell the daily $3.00-per-cwt limit for five straight days.  And in the real world of auctions and private-treaty sales, they remain too high.

Feeder steers are up sharply from a year ago and now represent about 79% of the total cost of finishing a steer, versus 66% last year.

And the situation for cattle feeders likely won’t get better without a fight.  The Sterling Profit Tracker shows beef packer margins still at a $61-per-head loss, although they improved by about $9 a head last week.

It’s true that packer losses are nothing new at this time of year, but current losses are $18 a head more than last year’s average of $44, and the beef cutout continues to sag.

 

WHY PAY TOO MUCH?

 

With losses beginning to mount, why are feeder cattle still bringing high prices?

Continued tight supplies of yearlings and calves to put on feed is the main reason, market sources say.  And the slow-motion nature of the cattle life cycle is another.  The market can move faster than the cattle industry, turning a seemingly solid play into a money loser overnight.

It takes about 18 to 24 months for a calf to reach slaughter weight and finish, depending on when it was born.  In that time, the fed cattle market can swing from profitable to unprofitable and back again, and cattle feeders get somewhat jaded.

And, since the cattle market swings back and forth, cattle feeders will put cattle on feed when a favorable outcome cannot be hedged because they hope prices will rise again by the time his cattle are ready for slaughter.

History has shown that producers will fight a losing situation repeatedly until equity losses become too great to buy another round of feeders.  Some sources have a general rule-of-thumb that feeders will lose money on three consecutive cattle-feeding cycles before pulling back.