Kentucky Beef Cattle Market Update

By Dr. Kenny Burdine, Livestock Marketing Specialist, University of Kentucky

The feeder cattle market shows no sign of weakness and seems to shrug off most anything that could potentially be seen as negative. At the time of this writing (July 8, 2014), feeder cattle futures contracts through the end of 2014 were trading above $217 per cwt. The August contract has increased by more than $35 per cwt since March. Fall contracts were actually trading at a slight discount to August, which is an atypical seasonal pattern as August is typically the peak of the feeder cattle market.

Two developments have only worked to strengthen what was already a record setting market this summer. The first factor was that the fed cattle market never made the seasonal low that is typically made in the summer. Fed cattle prices increased when they typically decrease and as that happened deferred live cattle futures moved upwards, supporting feeder cattle price levels. The December 2014 live cattle futures contract has moved from the upper $130's in early April to the mid-$150's at the time of this writing.

Secondly, the increase in live cattle prices has occurred at the same time as a significant decrease in corn prices. A combination of higher than expected acreage and favorable weather conditions has moved both old and new crop corn prices from the low $5 per bushel range to the low $4 per bushel range. While the two major drivers of feeder cattle prices (live cattle futures and corn prices) have both worked to support the market, it is hard to imagine that feeder cattle are worth more than $35 per cwt more than they were this spring. For producers targeting fall feeder cattle sale, a key question will be whether the market was severely undervalue then or if it is overvalued this summer.

This market has also been one to illustrate a risk management truth that is becoming more apparent all the time - these markets are impossible to predict and risk management is becoming more important all the time. This is the third straight summer that we have seen major swings in feeder cattle prices. Feeder cattle prices dropped drastically during the summer of 2012 as the severe drought brought about major increases in corn price. They rose by just as much during 2013 as the massive corn crop led to much cheaper corn and a combination of factors discussed has resulted in the hottest feeder cattle market that has ever been seen in 2014. I have often shared that my philosophy on risk management prioritizes protecting the downside first, then worry about the upside. However, a market like we have seen in 2014 does drive home the importance of considering upside potential as well. Producers who purchases put options or used synthetic puts this summer have done much better than those who forward contracted or sold futures.


Source:osu.edu