– Dr. Kenny Burdine, Livestock Marketing Specialist, University of Kentucky
The most encouraging news in cattle markets the last few weeks has been sustained improvement in fed cattle markets. After testing the waters under $1 per lb, cash cattle markets moved into the mid-$110’s per cwt the first week of December (see chart below). During the same time, summer CME© Live Cattle futures moved from the low $90’s to around $100, which pulled feeder cattle prices upward. While feeder cattle prices are still off around 30% from last year, the recent trend has been encouraging and suggests the market had become oversold.According to the Kentucky Livestock and Grain Market Report for December 5th, 550# steer calves sold in the mid-$120’s on a state average basis, which is up around $15 per cwt from their October lows. Large groups of 5wts steer calves were in the $130’s across many KY markets. Heavy feeder steers, 700 lbs and up are also moving at similar price levels. Many have commented that price slides seem to be especially narrow at the present time. I wanted to spend at little time reviewing this dynamic this month.
Price differences for feeder cattle by weight, commonly called price slides, are impacted by many factors. One of the more common factors impacting slides is feed costs. As feed becomes cheaper, as it has over the last couple years, price slides tend to narrow as feed cost of gain decreases. The overall market also impacts price slides. As the overall feeder cattle market decreases, price slides also tend to narrow as the value of cattle per head decreases. This is why price slides were so high during 2014 and 2015 as the feeder cattle market reached unprecedented levels. Clearly, both feed prices and the overall feeder cattle market level are impacting prices slides in 2016. However, I think the primary reason we are seeing little price slide in today’s market, has more to do with the expected direction of this market in the future. We will take a look at this from two perspectives.
First, I would point to CME© Live Cattle futures contract values. At the time of this writing (December 6, 2016), there was about an $8 per cwt difference between the April contract and June contract. This is a normal fed cattle price pattern, but does impact feeder cattle prices in the fall. An expected decrease in fed cattle prices from spring to fall tends to support the value of heavier feeder cattle that have the potential be finished by spring, as opposed to lighter cattle that would most likely hit the summer fed cattle market.
This can also be examined similarly from the calf perspective and putting one’s self in the shoes of a backgrounder or wheat grazer placing calves today, with the intent to sell those calves as heavy feeder several months from now. These operators look to deferred CME© Feeder Cattle futures to estimate expected selling price for these feeders in the future. A look at the current CME© Feeder Cattle board shows an expectation of declining feeder cattle prices through 2017. So, lighter cattle being placed into these programs, will hit a later market, which is associated with a lower expected sale price. This expected lower sale price makes these lighter calves slightly less valuable relative to the heavier ones. If the expectation of feeder cattle prices through 2017 were flat, this would not be an issue, but clearly this is impacting the value of lighter calves presently and working to narrow prices slides. Like many things in the cattle market, price slides are impacted by many factors and the dynamic nature of our current market is complicating what we know about price-weight relationships.