Successfully Hedging Feeders Is Hard

It looks like market fundamentals have little to do with feeder cattle futures price movements, making it necessary for cow/calf producers to be more savvy about marketing their calves, said a university agricultural economist in a weekly comment.

Andrew Griffith, extension agricultural economist at the University of Tennessee, added, “The futures market is supposed to be reflective of what is happening in local cash markets and thus provide producers the opportunity to use the futures market for price risk management purposes.

“However, the ability to successfully hedge feeder cattle appears difficult since it seems technical trading supersedes fundamental trading,” he said.

As a result, forward pricing opportunities appear limited.

It is next to impossible to outguess the market, so the best bet for producers may be to look at historical trends of calf and feeder cattle prices, Griffith said.

A Livestock Marketing Information Center graph of USDA Agricultural Marketing Service data shows that for producers with lightweight freshly weaned calves, market prices could trend downward from now through the summer and into the fall if they follow last year’s trend.

Last year, prices were beset with a growing US herd and increased calf production.  This year is no different, except that there are more cows to work with and more calves to be born.

If downward trending prices are a concern for producers who just had a crop of calves hit the ground then considering a weaning and preconditioning program to carry those calves into January or February of 2017 might be an alternative worth evaluating, Griffith said.

For producers with 400- to 600-pound calves currently, a preconditioning program also may be appropriate as feeder cattle prices tend to strengthen through the spring and into the summer months, he said.

High cattle prices the past couple of years have resulted in strong profitability for most cow-calf producers.  However, profitability over the next several years likely will be more dependent on cost management during a time of relatively strong prices.

Stockers’ biggest challenge will not be the sale price but the purchase price of calves, Griffith said.  Depending on the intended marketing strategy, stockers may have to reconsider the class and weight of calves they purchase while also making sure the weight class fits the feed, labor and land resources.

Prices may seem terribly low compared to 2014 and 2015, but profits can still be made in the cattle business, he said.

 

CASH CATTLE MARKET QUIET

 

Cash cattle markets Monday were quiet with no bids or offers reported.  Feedlot showlists were estimated to be smaller than last week, which could add some seller price leverage.

Cash markets last week traded lower at $127 per cwt on a live basis, down $7 to $8.  In dressed markets cattle traded at $200 to $201.50, down $14 to $15.

The USDA’s choice cutout price Monday was down $0.10 per cwt at $220.21, while select was off $0.46 at $210.23.  The choice/select spread widened to $9.98 from $9.62 as 93 loads of fabricated product were sold into the spot market.

The USDA said select and choice ribs, chucks and loins were steady to firm, while rounds were weak to lower.  Trimmings were mixed.

The CME Feeder Cattle Index for the seven days ended Monday was $146.58 per cwt, down $1.31.  This compares with the Apr CME settlement Tuesday of $146.57, up $0.55.