– Dr. Kenny Burdine, Extension Professor, Livestock Marketing, University of Kentucky
As I traveled across the state of Kentucky in November and December, a lot of discussion centered around what happened to the cattle market from mid-September to mid-December. Feeder cattle markets steadily climbed higher for about 9 months before dropping sharply in the fourth quarter. My Extension travel slowed for a couple weeks around Christmas and feeder cattle sale volumes were generally pretty light during this time. The transition into 2024 provided some opportunity to look back on last year without being distracted by the immediate market volatility being seen in the latter part of 2023.
The chart above shows nearby CME© feeder cattle futures prices, by month, from January 2014 to December 2023. On the far right, one can see the increase through most of 2023 and the sharp drop beginning in October. What is harder to see, is that the nearby feeder cattle futures contract was in the low-mid $180’s in January of last year. By December, nearby futures were in the low-mid 220’s. One year ago, if I had said that feeder cattle futures would be $40 per cwt higher by the end of the year, most would have found that to be very encouraging. It is just hard not to be influenced by the price levels seen last summer. By no means am I trying to make light of what happened during the fall months. Depending on when cattle were bought and / or sold, the imapct of a market swing of that magnitude can translate into several hundred dollars per head. But if I exclude 2023, I have to go back to the summer of 2015 to find a higher nearby futures price that what we are seeing at the present time.
While a longer term view may help put things in perspective, it is still worth thinking through the implications of last year’s market. I think we are being naïve if we don’t consider the fact that futures markets can move to levels beyond what is supported by the fundamentals. Last fall is probably an excellent example of this. There were some bearish factors in the market, but I think it’s hard to make a case that fundamentals explained all the price drop that was seen. But I also think we have to accept the fact that this occurs on the upside and the downside. One can look at the chart above and make a case that last summer was the outlier and current price levels are more in line with fundamentals. This is a matter of perspective and only time will tell, but one can’t dispute the fact that the futures market offered an opportunity to capitalize on some very high price expectations.
There is no way to know with certainty what the new year has in store for cattle markets, but I expect a better year than 2023. The October 2024 contract is trading at more than a $30 premium to January, which bodes well for prices throughout the new year. Producers will likely be presented again with some attractive pricing opportunities. I am convinced that one of the main reasons farmers don’t price cattle (LRP, futures, forward contracts, etc.) is the fear of pricing too low. Did some producers jump on the 2023 market too early and leave some money on the table? Absolutely. But a lot of them also failed to price at all and saw a great deal of value erosion. Predicting and timing these markets is not a game that can be consistently won. Due to the increased volatility in cattle markets today, producers need to be aggressive and opportunistic when pricing opportunities present themselves. Price risk management is not about maximizing price in a given year, it’s about managing downside risk over the long run.