Market Highlights: Should You Have Hedged Your Cattle?

FED CATTLE: Fed cattle traded steady compared to last week. Prices on a live basis were mainly $110 to $111 while prices on a dressed basis were mainly $174 to $175.

The 5-area weighted average prices thru Thursday were $110.37 live, down $0.28 from last week and $174.02 dressed, down $0.79 from a week ago. A year ago prices were $107.88 live and $171.13 dressed.

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It is difficult to tell who is winning the fed cattle trade war as prices have been fairly steady for three consecutive weeks. If one were to guess, packers and feedlot managers could either be satisfied or disgruntled at not gaining any ground the past few weeks.

It is difficult to imagine live cattle prices moving lower in the fourth quarter with a target as high as $120 before the end of the year. It may be difficult to reach the $120 price point, but cattle feeders will do their best to force prices higher.

December live cattle futures are just shy of $119 to end the week with plenty of time to push higher. Cattle feeders are looking beyond December as they continue to pay strong prices for feeder cattle which means prices will have to strengthen significantly for positive margins.

BEEF CUTOUT: At midday Friday, the Choice cutout was $204.38 down $0.33 from Thursday and down $0.60 from last Friday. The Select cutout was $193.59 up $1.03 from Thursday and down $1.12 from last Friday. The Choice Select spread was $10.79 compared to $10.27 a week ago.

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The monthly cold storage report was released this week detailing the quantity of meat in freezers at the end of August. Beef in cold storage at the end of August totaled 503 million pounds which is 27 million more pounds than one year ago.

Pork in cold storage totaled a little over 582 million pounds which is about 7 million more pounds than August 2017. Similar to pork and beef, poultry in cold storage at the end of August was 154 million pounds higher than last year and totaled 1.54 billion pounds with chicken accounting for nearly 928 million of those pounds.

There is no doubt there is a lot of meat in cold storage, but when put in relative terms, the numbers do not seem so large. For instance, weekly beef production in 2018 has averaged 506 million pounds which means there is one week worth of beef production in cold storage.

Similarly, weekly pork production has averaged 490 million pounds meaning there is just over a week’s worth of pork production in cold storage. One should note, the products (cuts, grind) in cold storage do not align with the products fabricated each week.

OUTLOOK: It is sometimes useful to use hindsight to make decisions for the current and future marketing time periods. Considering the November feeder cattle futures contract, it is very interesting to look at the price movement the past year and the hedging opportunities that were present at one time or another.

Open interest and volume in the November feeder cattle contract was not sufficient for trade until February 2018. During the month of February there was a small window to trade the November contract in the $153 to $154 price range. That window was extremely narrow, but a hedger could have traded near the $150 price mark the entire month.

Following the strong February, the November contract traded lower through March and traded below $140 in early April. The contract then rebounded to trade in the $145 to $148 range for much of April before dropping below $140 again in the middle of May. The November contract price strengthened from the Middle of May through most of July when the contract traded in the $154 to $155 price range for several days.

The strong early summer price movement was then tested by softer prices through most of August and early September when the November contract moved back to the $147 to $150 range. The past two weeks the November contract has been trading between $155 and $159 and is offering a strong price for feeder cattle.

The purpose of looking back at the market movement is to help producers understand that there have been several opportunities to hedge the sale of calves and feeder cattle this fall at profitable levels. This recount of the November contract will likely fall on some deaf ears since the market is currently strong, but what if the market was in one of its downward phases? Then the writer would be throwing salt in the wound! This is something to consider for marketing next year.

Spring futures are strong right now. The market will most likely trade lower at some point and it will likely trade higher at some point. However, selling a futures contract now and then buying it back when prices move lower could really help with margins on those cattle.

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ASK ANDREW, TN THINK TANK: A question was asked this week concerning the marketing of grass fed beef. This particular question was very specific, but it has a broader answer than just the grass fed beef business. When a producer begins evaluating a new venture it is important to understand the changes in production that must occur to achieve a certain product, but it is even more important to know and understand the marketing structure of the business. Questions that must be answered include: How will the product be marketed? Who will be the consumer of the product? How will excess production be marketed? Does excess production fit another market whether that is in live animal form or consumable product form? There are many similar questions that need to be answered. Maybe one of the most important things to know is the people up and down the supply chain. It is important to know the people in which one is doing business as building relationships and trust will always be a key factor.

Please send questions and comments to agriff14@utk.edu or send a letter to Andrew P. Griffith, University of Tennessee, 314B Morgan Hall, 2621 Morgan Circle, Knoxville, TN 37996.

FRIDAY’S FUTURES MARKET CLOSING PRICES: Friday’s closing prices were as follows: Live/fed cattle –October $113.45 +0.23; December $118.85 +0.28; February $122.80 +0.25 Feeder cattle –October $158.18 +0.33; November $158.05 +0.43; January $154.65 +0.15; March $153.30 +0.68; December corn closed at $3.56 down $0.09 from Thursday.
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