CATTLE MARKET REVIEW

Last Week

COMMENTS from Oct.23rd

Cash cattle prices were sharply lower during September (figure 1). The only prices that finished higher were some of the live cattle futures prices. The feeder cattle futures prices were sharply lower. The weekly stocker cattle prices are under seasonal price pressure and what seems to be a good (ample) supply of heavier-weight feeder cattle at South Dakota sale locations (figure 2). The corn price rally and general uncertainty are weighing heavily on stocker prices as well. The volume traded has increased in the past few weeks. For September the location basis (cash stockers minus the CME Feeder Index) was relatively narrow.

The October Crop Production report showed that hay production estimates were unchanged from August. If realized the production and supply (adding in old stocks) levels would be the highest in South Dakota since 2001. This is also the third year in a row of above-average yields. Quality has been a concern all year, but production is generally the main concern from a beef perspective. Prices have been pressured by continued low milk prices. In South Dakota the alfalfa price in September was $75 per ton and the other hay price was $60 per ton (figure 3). Thus, prices are back at levels last observed in 2006. Typical fall disappearance would result in stocks on December 1 slightly above last year’s level.

Late in September there were some mixed signals from the Quarterly Hogs and Pigs report. Sow farrowings were exceptionally high during 2007 (figure 4). Furthermore, the farrowing levels exceeded expectations for several quarters in a row. The result was more pigs (and pork) than pork producers and beef producers expected. The increased pork production also happened at the same time corn demand was under pressure from ethanol production. Sow farrowings have been tapering off since the peak, but are still not down to the levels from earlier this decade. The farrowings seemed sustainable when they hovered below 2.9 million head per quarter. The latest intentions are 2.935 million head farrowing from September through November and 2.93 million head farrowing from December through February. Thus, based on farrowings alone there will be ample pork production for the next year. Productivity has also increased as the latest report showed a sharply higher 9.70 pigs per litter. Back when farrowings were last below 2.9 million head, productivity was closer to 9.00 pigs per litter. Note that these figures do not account for changes in the Canadian inventories.

The latest WASDE report did show a slight reduction in the price expectations for the fourth quarter of 2009. However, the early projections for the third quarter of 2010 show a huge disparity compared to the futures prices (figure 5). The substantial upside after the first quarter of 2010 suggests that the upside be left open by using put options, LRP, or similar protection strategy. The ERS price projections for feeder cattle have fundamental support for higher prices (both now and into 2010. The projection range is almost completely above futures prices through the next year (figure 6). Thus, there remains substantial upside potential for prices based on fundamentals (i.e., there are no guarantees of the upside occurring). The message, however, is consistent with tightening supplies of cattle in 2010 and an improved economy. The same protection strategies apply: LRP, put options, and their equivalents would leave the upside open. The lower volatility in recent months makes these tools relatively affordable.

In the Chute:

Sioux Falls Regional Livestock - Slaugher Cattle Auction