Market Highlights: Using Hindsight with Cattle Markets
FED CATTLE: Fed cattle traded $3 lower on a live basis compared to last week. Live prices were mainly $123 to $124 while dressed prices were mainly $198 to $200.
The 5-area weighted average prices thru Thursday were $123.70 live, down $3.05 from last week and $198.96 dressed, down $5.66 from a week ago. A year ago prices were $124.96 live and $193.62 dressed.
The finished cattle market has traded from $122.56 to just shy of $129 since the beginning of the year. However, the futures market is beginning to paint a dismal picture for the summer and fall months. The June live cattle contract price has declined $8 in the past two weeks with the August and October contracts trading $4 lower than the June contract. If this price decline is realized, the market will have declined 14.6 percent from its spring high to its summer low which is only slightly higher than the seasonal 13 to 14 percent that is normally experienced. Some may question the expectation of the price decline due to cattle on feed numbers or other factors, but the market has a way of balancing based on supply and demand.
BEEF CUTOUT: At midday Friday, the Choice cutout was $228.00 down $0.80 from Thursday and down $3.90 from last Friday. The Select cutout was $213.52 down $1.56 from Thursday and down $5.44 from last Friday. The Choice Select spread was $14.48 compared to $13.94 a week ago.
The Choice cutout has traded above year ago levels every week of 2019 except for one. One should be able to say with certainty that the strength in the cutout price has supported the finished cattle market despite the 1.9 percent increase in total cattle slaughter which means the average weekly slaughter is nearly 12,000 head higher than the same period in 2018. The increase in slaughter numbers through the first seventeen weeks of the year are from heifers and cows. Even with 198,000 additional head in the slaughter mix thus far, domestic beef production over that time is only 0.7 percent higher than a year ago or 56.4 million pounds. The ability of packers to push the Choice cutout price higher than year ago levels with additional beef on the market would point to strong beef demand. In the near term, consumer demand and support for beef prices will originate from the rib and loin primal as consumers will look to middle meats for the fast approaching grilling holidays and Mother’s Day when restaurants see a lot of business.
OUTLOOK: It has often been said that hindsight is 20/20, but one must first understand that 20/20 vision is essentially average or what is considered “normal” eyesight. Thus, 20/20 vision seems rather poor if one is using hindsight. In other words, if a person could use hindsight to make decisions, should not their decisions be far better than average?
Consider the extremely high cattle prices in 2014 that later dropped like a rock in late 2015. In hindsight, selling every head of cattle a person owned in 2014 and then buying back animals in late 2015 would have resulted in windfall gains for most commercial cattle producers. Therefore, when one looks back at this time period, how many people would have actually done this? The producer who did this could most certainly purchase better genetics than they sold and still have money left in the bank.
Maybe it is worth considering a more recent and much smaller market move. Using August feeder cattle futures as the example, the August contract has declined $12.75 per hundredweight since the 18th day of April which equates to $102 per head price decline on 800 pound feeder cattle. Prior to this price decline, the August contract had 26 consecutive closes between $154 and $161 with 16 of those days closing at $157 or higher. Using hindsight at 20/20 vision, a person could have hedged cattle any of those 26 days and be at least $6 per hundredweight better off than today. However, a person using hindsight would have sold a futures contract for August on April 18th when the contract traded to a high of $161.40 which was $14.50 per hundredweight higher than the close on May 2nd. In retrospect, hindsight should be much better than 20/20 and be more like Ted Williams eyesight. Based on Tennessee weekly auction market averages, steer prices were $1 to $5 lower compared to last week while heifer prices were $3 to $6 lower. Alternatively, slaughter cow and bull prices were steady to $1 higher compared to a week ago.
ASK ANDREW, TN THINK TANK: A recent discussion about hay sparked my interest in that a couple of hay producers have presold large quantities of hay this year and have yet to put the sickle in the field. It was not the preselling or the not harvesting hay yet that caught my attention. It was the strong demand for hay that reaffirmed an expectation I already had that people are short on hay. The December 1 hay stocks report displayed information that hay stocks at the beginning of December were lower than the previous year levels and rather low historically speaking. It is likely the May 1 hay stocks report will convey an even more dismal hay stocks picture given the rather tough winter most livestock producing regions experienced. It also appears the spring hay crop in Tennessee is going to be short. Thus, the recommendation is to purchase hay early and often until the barn is full and hay needs are met. Any form of poor hay making conditions this summer and fall could result in hay prices spiking.
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 –June $113.43 -0.25; August $109.15 -1.03; October $109.68 -1.00; Feeder cattle –May $137.15 -1.83; August $146.38 -1.53; September $147.15 -1.35; October $147.78 -1.28; May corn closed at $3.63 up $0.01 from Thursday.
