An early 2022 increase in fed cattle prices has softened, prompting some to ask about short-run price direction, said South Dakota State University Risk Management Specialist Matthew Diersen in a letter to Extension agents through the Livestock Marketing Information Center called In The Cattle Markets.
The USDA’s boxed beef price fell sharply since peaking early in the year, and the cost of corn rose sharply and steadily in the past few months, Diersen said. These factors combine to affect the expected profitability of finishing cattle negatively, resulting in some cattle being pulled forward. Evidence supporting this includes a slight reduction in cattle on feed for more than 120 days.
Marketing sooner means more beef in the short run with price pressure, but the prospect of higher prices later in the year, Diersen said.
WEIGHTS REMAIN HIGH
Slaughter weights, seem to contrast with more aggressive sales efforts, as they remain high, suggesting cattle are not being pulled forward, he said. However, higher fed cattle prices occurred with higher corn prices at the start of the year, so weights likely will be pressured going forward.
In addition, heifers on feed Jan. 1 was up from a year earlier, appearing now in the form of higher heifer slaughter, Diersen said. Typically, heifer slaughter weights are lower than steers, so the mix also affects total beef production.
The disparity perhaps is showing up in the divergence of prices in nearby and deferred futures prices since the beginning of the year, he said. Apr futures have fallen sharply, but the Dec futures have been relatively steady.
SEASONAL TRENDS
This is the time of year when packers try to have a larger share of fed cattle forward contracted, Diersen said. As of March 14, feedlots had contracted 235,000 cattle for delivery in April and 139,000 head for June.
A year ago, 271,000 head were contracted for April and 170,000 for June, he said. Thus, the pace of contracting is running behind last year, even though short-run supplies of cattle on feed are similar to a year ago.
Higher corn prices have had a few related effects on cattle prices, Diersen said. Nearby futures are much higher than deferred and new-crop prices, but overall prices are higher regardless of when corn would be bought.
Such situations often lead to inquiries about managing price risk, he said. However, this increase also drove the implied volatility higher, especially for old-crop corn.
Thus, buying a corn call option has become very expensive, Diersen said. The corn volatility also carried over into higher feeder cattle volatility, making managing feeder risk more expensive for all.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $138.00 to $139.90 per cwt, compared with last week’s range of $136.00 to $141.52. FOB dressed steers and heifers went for $216.58 to $218.46 per cwt, versus $216.09 to $220.18.
The USDA choice cutout Tuesday was up $0.63 per cwt at $264.50, while select was down $1.48 at $254.84. The choice/select spread widened to $9.66 from $7.55 with 76 loads of fabricated product and 12 loads of trimmings and grinds sold into the spot market.
The USDA reported that basis bids for corn from feeders in the Southern Plains were unchanged at $1.45 to $1.55 a bushel over the May futures and for southwest Kansas were steady at $0.00 over May, which settled at $7.26 1/4 a bushel, down $0.22 1/4.
The CME Feeder Cattle Index for the seven days ended Monday was $155.29 per cwt up $0.18. This compares with Tuesday’s Mar contract settlement of $156.70 per cwt, up $0.60 and Apr’s $164.35, up $3.52.