While incentives to retain calves to add weight appear to be present this year in some locations, producers must calculate their value and cost of gain to determine if it is a correct decision, said University of Nebraska Livestock Extension Economist Elliott Dennis, in a letter to Extension agents.
The letter went out from the Livestock Marketing Information Center and was called In The Cattle Markets.
Using some form of risk management also could be appropriate, Dennis said. In situations of uncertainty about price direction, knowledge of price volatility is important.
If volatility is high, synthetic puts are appropriate, he said. Risk management decisions could help limit some of the effects of an adverse price movement from softening beef demand or worsening crop/forage conditions.
FUTURES INCENTIVISING RETENTION
The CME futures market appears to be providing some incentives for producers to deliver cattle at later dates, Dennis said. As of Oct. 25, there was about $2-3 per cwt increase between contracts with Jan trading at $158.90 and Apr trading at $163.38, all of which are higher than the Oct ’21 contract of $155.78 and the feeder cattle cash index of $153.35 per cwt.
Producers should combine CME futures prices with historical price data across different weights to calculate what is known as the “value of gain,” he said. Then add current and expected feed prices to calculate the “cost of gain”.
Finally, compare the calculated value and cost of gain, which provides a simple “feed/no-feed” decision, Dennis said. If the value of gain is greater than the cost of gain then there are financial incentives to retain and feed cattle. However, if the value of gain is less than the cost of gain then there are no market incentives to retain and feed cattle.
THOSE OTHER FACTORS
Weakening demand for beef and crop/forage conditions are two factors that could negatively affect the retention decision by decreasing the value of gain or increasing the cost of gain, Dennis said. Strong retail and export beef demand have supported prices for livestock even given disruptions in the supply chain.
However, beef exports have started to slow, and there are few advanced purchases into 2022, he said. This is one indication that the export markets may have started to move away from higher-priced US beef.
In the domestic market, advanced purchases of wholesale beef from retail stores also have started to slow, indicating that perhaps domestic retailers are more willing to live in the cash market and adjust featured products in the short run.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $125.93 to $127.34 per cwt, compared with last week’s range of $124.70 to $127.09. FOB dressed steers and heifers went for $195.39 to $198.32 per cwt, versus $195.10 to $196.72.
The USDA choice cutout Thursday was up $1.73 per cwt at $290.22, while select was up $0.50 at $268.22. The choice/select spread widened to $22.00 from $20.77 with 128 loads of fabricated product and 19 loads of trimmings and grinds sold into the spot market.
The USDA reported Thursday that basis bids for corn from livestock feeding operations in the Southern Plains were unchanged at $1.30 to $1.40 a bushel over the Dec futures and for southwest Kansas were unchanged at $0.40 over Dec, which settled at $5.59 1/4 a bushel, down $0.04 3/4.
The CME Feeder Cattle Index for the seven days ended Wednesday was $155.81 per cwt up $0.16. This compares with Thursday’s Nov contract settlement of $158.02 per cwt, down $1.15.