No good analysis of the Live Cattle market is complete without an analysis of the Feeders and the feed. One can evaluate short term opportunities in one or the other, but it never hurts to have the whole picture. So here is my assessment. I Just completed my annual tour for the cattle market through most of Southeast Colorado & Southwest Kansas. Virtually all the feeder producers are continuing to market as many feeders as possible. Unlike past price surges in the feeder market where producers most often commence rebuilding inventory, producers are faced with unprecedented prices, most often with strong positive basis and small price slide along with continued dry to drought conditions that limit the number of head the land will support. Recent rains have greened things up a bit but this seems to have only delayed marketing by giving the producer the opportunity for a few weeks of easy weight gain. After my review of the 2 dozen or so feedlots visited ranging in size from 5,000 to 32,000 head capacity, I'd have to say that feedlot utilization is running about 65 to 75 percent. My visits to sale barns showed an averaged about the same as last year for this time of year and with the usual expectations for increased marketing through late summer and fall as most of the spring calf's come in. I would expect prices to remain relatively strong since a vast number of Cattle Finishing Operations utilized futures market to hedge price risk. The Feeder Spread for the Aug., Sep., Oct., & Nov. feeder delivery gave buyers the chance to lock in Gross Feeder Margins (GFM) between $14 & $16 per cwt. or $170 to $200 per head. It's probable the cattle buyers are able to pay the high price combined with the high positive basis without too much impact. However current GFM for 2014 contracts have fallen to the $4 to $6 range per cwt. and the 2015 contracts have dipped to levels not seen for over 30 years (see attachment) with highs only $6 and lows below $2. At these levels cattle finishers can make better returns on capital with bank deposits. The Feedlots are the ones currently feeling the squeeze with the cost of weight gain running around 75 to 85 cents per lb. and future hedges will most likely only lock in losses. The recent fall in feed prices seemed to have provided only a brief pause in the GFM's decline. Going forward into 2015 and 2016 something's got to give. Any heifers born in late spring, early summer 2014 retained for breeding, of which it looks to be a very small number, will require at least another 8 to 12 months to mature. Add another 9 months for gestation and at least another 8 to 9 months before any marketing's of the new calf's. Everything continues to look like short supply on the feeders for some time. It's likely that feed prices will not provide much, if any, relief by price declines. The only component left is Live Cattle. I would expect the recent higher prices to show up on store shelves, how much this effects consumer demand is open for debate, but with the constrained supply of feeders and not much chance for relief on the feed side, the price of the finished cattle should be the factor that returns the cattle finishing operation back to profitability. I was only able to view about 700 head at the sale barns visited. I plan on attending a feeder special auction Wed. Aug. 13 with about 1800 to 2000 head expected. Should give me a better assessment of current Price Basis, Price slide and Pencil Shrink.
Thanks for the thorough supply side analysis. Price is based on supply and demand. The bigger question now is the demand side and whether consumers are going to substitute.
Looks like that 150 point was a pretty weak support area. It rallied from there but that was only a day. This Live Cattle market has been interesting to say the least.
It sure is. No question about the bleak supply outlook...but now traders are wondering if the consumer will support these high prices. Bad news today on the retail front means the consumer is weak. If we rally back up to the 150 level, I'd say that would be a sell.....with a nice head-and-shoulders pattern apparent.
Havent had time to study a a cattle chart; too much already on my plate,, so to speak. Rancher neighbor, when i asked him if he thought cattle was stiil going UP????? He said i dont know, he did mention the strong prices,+ low herd numbers.[He sold out several week ago/auction market.] Hard to improve on bar-b- q- beef; but venison+ , home grown chicken[bar-b-q] will beat beef anytime. Not a prediction; plenty of people like beef, grass fed beef, also.