Kentucky Beef Cattle Market Update - February

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

After dropping by more than $30 per cwt since December, feeder cattle markets seemed to find some footing in late February and carried that into the first of March. At the time of this writing, March CME© Feeder Cattle futures had gained back a little more than a third of what had been lost in the last few months. While the rally was welcome news in the market, winter backgrounders who placed calves in the fall are facing very unattractive margins if they chose not to utilize some type of price protection on calves they placed this fall.

In November, I was running winter backgrounding budgets with expected returns of $125 to $200 per head. However, those returns have evaporated if sale price was not protected. This market has been a prime example of why risk management should be a consideration for backgrounding and stocker programs.

While calf prices have decreased as the feeder cattle fell, they did not fall near as much as feeder cattle futures. The negative impact on calves from decreasing deferred feeder cattle futures prices has likely been offset by the positive impact on calf markets as we have moved closer to spring. Calf markets usually reach their price peak with the onset of spring grass, typically in April. Many producers are likely purchasing calves ahead of this seasonal price peak with the intention of placing them on grass in the next month.

Last month's discussion was focused on summary and implications from USDA's cattle inventory report. There were two main messages from that report. First, the cow herd is larger in 2015 as a result of decrease cow culling in 2014. Second, expansion (through heifer development) does appear to be underway. Both of these factors will impact prices in 2015. At the same time, significant production increases are likely for both pork and poultry this year, which has the potential to put some pressure on boxed beef prices. I actually see the latter as the biggest threat to the cattle outlook in the second half of 2015.

The year 2014 was a very atypical seasonal market for Kentucky as calf prices rose throughout the year and were considerably higher in fall than they were in spring. However, this is not likely to be the case in 2015. I think we will see our highest calf prices this spring and see a relatively steep drop as we move towards fall. As I write this, the fall board is trading at roughly a $6 discount to the March CME© Feeder Cattle futures contract.

In addition to this expected drop, Kentucky calf basis is typically much weaker in the fall of the year. If our seasonal basis tendencies hold for 2015, we could see a $20-$30 decrease in calf prices from spring to fall this year. While this would be a significant drop in price ($100 to $1500 per calf), it is worth noting that this would still leave us with an extremely high fall calf market by historical standards. Cow-calf producers should continue to use increased returns in 2015 to position their operations for the future.

Source:osu.edu