Cattle market impacts Zimmerman looks at future for cow/calf producers
With hay and corn prices expected to rise this summer as a result of drought across the U.S. during the growing season, Lance Zimmerman said, “Higher feedstuffs prices are going to depress feeder cattle futures.”
During a May 23 Trends+ webinar, Zimmerman looked over the summer at what to expect for cattle prices.
“For all intents and purposes, we’re at the highest levels we’ve been at since 2015 for feeder cattle prices relative to the deferred live cattle prices,” Zimmerman said. “None of us are happy with where cattle are priced today as feeder cattle sellers, and we’d expect more liveliness in the market.”
Currently, the market has stagnated as a result of pressure on the marketplace from corn prices.
“It’s bearish to the entire cattle complex if cattle feeders are selling cattle at a loss,” Zimmerman explained. “As we made the transition from April into May, we’re not forecasting a profit for cattle feeders prices going forward if these future prices hold.”
He also noted CattleFax believes futures are oversold today, noting that CME has seen a bearish attitude for protein in general.
“Even a change of $10 would only take these prices back to break-even in many incidents,” he said. “If we look at this today, we’re projecting $100 losses in the futures prices. This has limited the ability of the feeder cattle market to have a seasonal rally and be as robust as we expect.”
CattleFax also looks at the current fed cattle price relative to the purchase price of cattle coming in and their break-even.
“When break-even exceeds the current fed cattle price, we call that a negative swap,” Zimmerman said. “Cattle feeders are buying a loss this time of year on the swap, and when we do this, it’s hard to get these cattle to offset that loss.”
He continued, “This is another signal that tells us we may still get a seasonal rally, but it may be pretty underwhelming.”
Bearish markets are also reflective of concerns of existing supply.
Current fed steer and heifer slaughter have shown three-week highs in this phase of the cattle cycle for fed cattle.
“It’s higher than any point this last year,” Zimmerman said. “What the market is also looking at is the fact that we placed a lot more cattle in feedyards through the fourth quarter of 2017 and first quarter of 2018.”
Cattle outside of feedyards numbered 500,000 to 600,000 head below year ago year-ago levels.
“As we work through the supply that is already in the feedyard, on-feed inventories will tighten,” he said. “We’re sitting here today 800,000 to 900,000 head above year-ago levels.”
The peak in June 2018 will be followed by an additional response in the market that puts a premium in December.
“We have a cattle feeder that recognizes he’s losing money. He also recognizes every animal in the yard is likely to lose money, but he also sees the market dangling a carrot in front of him in December,” Zimmerman said, which will encourage cattle feeders to keep cattle on feed a bit longer.
Zimmerman added, “We have a futures market that is set up in a way that incentivizes the cattle feeder to kick the can down the road with his marketings, add feed, add weight and risk adding un-currentness into the marketplace.”
The calf market is expected to follow a trend similar to 2017.
“Corn prices, available supplies and the like are probably going to sit back and cause this market to be more supported on the front end of summer for summer video sales than on the back end for fall delivered calves,” he said. “As we get into fall, I think our risk is back closer to $150 if things get more bearish and regional supply factors become a challenge.
“We could have supply risk that potentially pushes prices into the upper $140s,” Zimmerman said. “I think as we look at the calf market through the summer and fall, this range from the low $160s into the upper $150s is going to hold for those who like to get calves contracted early.”
Fundamental risk could be as low as 2016, dropping to $120 on heavier feed cattle and mid-$120s on calves.
“We don’t foresee any of these challenges happening,” Zimmerman commented, “but we have to recognize there is risk in this marketplace.”
The May 23 CattleFax Trends+ webinar was sponsored by Elanco Animal Health.
Saige Albert is managing editor of the Wyoming Livestock Roundup and can be reached at firstname.lastname@example.org.