Cattle on Feed

– Matthew Diersen, Risk & Business Management Specialist, Ness School of Management & Economics, South Dakota State University

Friday was the December Cattle on Feed report. The trade expectations told a consistent story of lower placements and marketings from a year ago. The actual numbers came in consistent with those expectations. The total on feed, 12.0 million head, was up slightly from 2019. Placements were seasonally lower overall. Kansas was an exception with steady placements, boosting their on-feed total from last year. The placements across weight categories reflected fewer placements in the heaviest and lightest weight categories, following uniformly lower placements last month. Many of the swings from the spring COVID-19 disruptions seem to be working through the system.

Heading into 2021, it is a prudent time to consider marketing plans for cattle. In the northern plains that may very well be several components: one for calves, one for yearlings, one for retained ownership, etc. The cash cattle trade has some consistent seasonal patterns. Catching the early spring seasonal high in fed cattle may be an objective. A way to do that in advance is to use futures or options. For example, the live cattle futures contract currently show the implied pattern prices may take for 2021, with April trading at a $4/cwt premium to the surrounding contract months. As a non-storable commodity, cattle do not have the carrying charge forces at work like the grains and oilseeds contracts.

Making sense of the patterns in futures prices requires looking across contract months and looking at patterns within specific contracts. For live cattle, the even-months have contracts: February, April, June, August, October, and December. It is important to understand the price chart you are looking at to guide decisions. Sometimes when you try to find a longer-run price chart, many providers will display a price series that reflects prices across a series of nearby contracts rolled at or before expiration. Such charts are useful for analyzing prices, but less useful when guiding specific hedge decisions. For example, last summer when the nearby rolled from June to August, the prices used went from $91.65/cwt to $97.30/cwt. Most other rolls were less extreme, but the underlying pattern could not be captured by placing hedges and not changing contract months.

A better approach is to use the cash price series or nearby futures series to guide target months for marketing, then switch to specific contact months to see the behavior of the chosen futures contract. For example, if cattle will not be finished until May, then the June contract would likely provide better hedge protection than the April contract, even though the April price may look more attractive. The price objective is then to pick a price level for June futures that is acceptable. The June futures price will likely adjust with other futures prices, but its tendency is to remain below the April futures price. To lock in a seasonally high June futures price will likely require monitoring the June contract price on its own. Usually, data providers have a way to overlay earlier charts on top of the current chart.