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Fluctuating feeder cattle prices perplexing agriculture analysts
 

By DOUG SCHMITZ

KNOXVILLE, Tenn. — Fluctuating feeder cattle prices are continuing to perplex farm analysts, according to Andrew Griffith, University of Tennessee extension agricultural economist.

“If a person solely used feeder cattle futures as his or her only cattle price information, then that person would likely be extremely confused at this juncture,” he explained. “The reason for the confusion would be largely due to prices fluctuating tremendously without any solid information to cause such fluctuations.”

According to Griffith’s Nov. 23 market outlook, the January futures contract jumped from $138 per cwt. in early April to more than $156 in early October, with the price sitting in the mid- to upper-$140s the past couple weeks.

He said the tendency of most people in the industry is to view the fluctuation in futures prices as a negative, when in fact it could be viewed as quite positive. “The reason most producers would view futures price fluctuations as a negative is because a downward move in the futures generally has a negative impact on cash selling prices, which means fewer dollars of revenue at sale time,” he said.

“This is only negative if prices fall before a producer markets his or her cattle. Alternatively, an increase in futures just prior to marketing cattle could result in greater revenue.”

However, Griffith said a producer simply being at the will of the market, given its ups and downs, is not a favorable marketing strategy.

“One should look at the opportunities offered by the futures market to hedge cattle sales at profitable levels,” he said. “In the case of January, there were 17 days in which the contract traded above $153 per cwt. Only one of those days had the highest price, but one does not have to hit the very top, but rather, lock in a profit.

“This is easier said than done, as no one wants to miss out on the market moving higher, but there are plenty of complaints when the market moves lower. The market almost always provides a favorable marketing opportunity if one will just start looking for it.”

The USDA’s November Cattle on Feed report for feedlots with 1,000 head or more capacity indicated cattle and calves on feed as of Nov. 1 totaled 11.69 million head, up 3.2 percent, compared to last November – with the pre-report estimate average expecting an increase of 4.3 percent.

“October placements in feedlots totaled 2.25 million head, down 0.6 percent from a year ago, with the pre-report estimate average expecting placements down 0.9 percent,” he said. “October marketing’s totaled 1.89 million head, up 4.8 percent from 2017, with pre-report estimates expecting a 4.2 percent increase in marketings.

“Placements on feed by weight: under 600 pounds, down 5.2 percent; 600 to 799 pounds, down 11.4 percent; 800 to 899 pounds, down 1.4 percent; and 900 pounds and over, up 8 percent.”

Griffith said the on-feed report should not have provided a reason for finished cattle prices to escalate Thanksgiving week to the degree they did. “Thus, what caused finished cattle prices to run like they did this week? The best answer is that packers were trying to secure cattle to meet holiday needs. This means previous analysis could not have been more incorrect.”

Dave Miller, Iowa Farm Bureau Federation director of research and commodity services, noted the U.S. fed cattle and feeder cattle markets are experiencing wide fluctuations within a relatively wide range, with most of the volatility likely coming from outside markets.

“Earlier this year, there was pressure from falling pork prices and concerns about how Chinese tariffs on pork and NAFTA negotiations would affect beef exports and fed cattle prices,” he said. “But then corn prices dropped significantly with projections of record corn yields in a number of states and ‘plenty of corn’ waiting to be fed. This propped up feeder cattle futures in September and October.”

However, Miller said reductions in some of the corn yield estimates and a delayed harvest gave some strength to corn prices, “and with a bit of pressure on beef prices, that sent feeder cattle prices back towards the low of the range.

“Now with prospects of trade issues with China at least receiving some positive commentary, fed cattle and feeder cattle prices are moving a bit higher and now set in the middle of the yearly range,” he said, “all of this without much change in cattle industry fundamentals. It just exemplifies how other markets can affect commodity prices.”

Griffith said the futures market would support stronger prices moving through December and into 2019. “Higher prices will only benefit cattle feeders and improve margins, but feedlot managers should look at hedging a few sales if margins are positive,” he added.

12/5/2018