CATTLE MARKET REVIEW

Last Week

COMMENTS from June 19th

Cash cattle prices were steady during May (figure 1). Cull cows were higher for the month. The live cattle futures prices are steady to lower compared to last month, while the feeder cattle futures are sharply lower. The weekly stocker cattle price has fluctuated around $120 per cwt. in recent weeks without any major seasonal rally (figure 2). The stocker price is a weighted average of 500-600# steers from AMS reported locations in South Dakota. In a couple of weeks Sioux Falls will not longer have sales. However, the AMS recently added Sioux Falls Regional Livestock in Worthing, SD to their list of reported locations. Auctions in Mobridge and Yankton were each added in the past year so the volume reflected in the stocker price series will likely not be affected by the loss of Sioux Falls.

Historically there are some direct sales of calves by this time of year with fall delivery dates. However, the AMS reports in recent weeks suggest that sellers are holding out for better prices. Seasonally this is the time of year with the most volatility in the corn market that carries over to the feeder cattle market. As cow-calf producers look to fall pricing opportunities the risk is difficult to ignore. The November feeder cattle futures contract has been trading around $98 per cwt. in recent weeks. Looking at the past 10 years the November contract is quite volatile between June and November. In 2003 the price increased over $17 per cwt. before settling (figure 3). In 2008, however, the price decreased over $17 per cwt. Protection strategies, while appropriate for transferring this risk, are currently giving a floor price of around $100 per cwt. for calves. Producers will really need to weigh the risk against giving up the large premiums for insurance available at this time.

A report released in late May by NASS, Meat Animals Production, Disposition, and Income, shows the aggregate effects of higher feed prices and lower cattle prices. In South Dakota cattle production was up slightly to 1.48 billion pounds for 2008. However, cash receipts were down from levels observed in recent years (figure 4). Receipts were $1.7 billion in 2008, down from $1.8 billion in 2007 and the lowest since 2004. This report adjusts for calves that enter and leave the state, so while receipts are important so is the net value of production. For 2008 the value of production was $1.4 billion, down slightly from 2007. Thus, more pounds were produced for less money. The value of production is at the lowest level since 2003. The lower prices for the year to date do not bode well for the value of production for 2009.

The latest WASDE report had very little adjustment to the live cattle projections. The projections remain above the futures prices through the rest of 2009 (figure 5). Protection strategies would be warranted until the pattern shifts for the first quarter of 2010. The ERS price projections for feeder cattle shows upside potential for the next three quarters compared to current futures prices (figure 6). Protection strategies, while warranted, would not give much for a floor price. One alternative to consider are synthetic puts: selling a futures contract and buying an out-of-the-money call option. A synthetic would give a higher floor price and leave the upside open compared to buying a put option outright. Finally, May feedlot placements were down sharply compared to last year and relatively few heavy cattle were placed on feed.

In the Chute:
July 10: Live Cattle Projections (WASDE)
July 24: Cattle (NASS)