The bull market continues in cattle with record cash prices fueling all-time highs in nearby live and feeder cattle futures again on Tuesday. The action is leaving the industry — especially producers — wondering if there is anything that can stop this incredible run?
Cash is King
Brad Kooima, of Kooima Kooima Varilek, calls this the bull market of his career. He says the key is cash trade leading the futures, with fed cash cattle hitting a new record again last week. The average steer price came in at $243.17, which was up $3.79 from the previous week.
“Cash is king with one packer in particular coming out there and paying higher money in areas of the cattle belt on Friday,” Kooima says.
The South traded mostly $235 to $236 live, with the volume in the North at mostly $245 live.
“Probably the high point of the whole deal came Friday in western Nebraska at $247. So again, there’s a wide range of markets — North is generally higher than the South — but new record highs here again and very impressive,” he explains.
Closeouts Also at Record Levels
The good news is profit margins per head for feedlots are also at record highs, according to Scott Varilek of Kooima Kooima Varilek.
“Near a $1,000 a head closeout profit, and you’re wanting to take that for sure in my opinion,” he says.
Profitability Throttles Back Expansion
And that profitability is leading to a lack of heifer retention and expansion, says Don Close, senior animal protein analyst for Terrain.
“Even with the reduction in cow slaughter that we have seen for the year, in my line of thinking, mathematically, we’re still liquidating,” he explains. “Now there’s plenty of anecdotal evidence of people retaining heifers. But I don’t think we’ve numerically reached a plateau yet to think we’re into net expansion.”
Brady Huck of Advance Trading agrees, but adds some of his clients are starting to think more seriously about rebuilding.
“There’s also some tax implications as ranchers are out there selling their steer calves at record prices,” he adds. “If they go sell their heifer calf crop as well, they get into a situation where they’ve got to pay taxes on all that income — and you know how they hate to do that.”
When Will the Market Top?
Market analysts have been hesitant to call a top in the futures because live cattle are trading at such a steep discount to the cash trade. Plus, technically the futures have hit contract highs several times and put in key reversals only to have that bearish technical pattern negated.
Kooima says markets often top when the news is the most bullish, and there has been plenty of fundamental news for the bulls to feed on.
Supplies are tight, with the historical low in the cattle herd fueling the record cash prices for both fed and feeder cattle.
However, the market has also been fueled by the closure of the Southern border to Mexican feeder cattle, and the big key has been strong consumer demand.
What Could Break the Market?
Kooima says one thing that could break the market is a slowdown in consumer demand, which so far hasn’t happened — even with record-high retail beef prices.
The other possibility is a break in the cash market as packers get tired of negative margins.
Tyson Foods reported beef processing margins were down 8.8% in Q2 for a loss of $494 million.
Processors have been cutting kills for several weeks to prop up boxed beef values and stem their losses, but those kill cuts are ramping up even more.
Kooima adds, “I think there’s going to be a lot of kill cuts this week, you know, excuses for cooler clean outs and repairs. I think you’re going to hear a lot of 32-hour weeks in some of these places.”
With the fund, or managed money traders, near record long in the market, the other fear is a black swan event that could cause them to liquidate.
At these price levels, that means increased volatility in the cattle market. So, market analysts agree risk management is more important than ever.
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