CattleFax: optimism expected to return to market this fallWritten by Christy Martinez
Laramie – Brett Stewart of CattleFax says calf and feeder prices are a big deal this year, and are a key number to follow.
“On Jan. 1 we were down about a million head of feeders and calves outside of feedlots,” said Stewart to attendees of the Wyoming Cattle Industry 2011 Convention and Trade Show in Laramie on June 3. “That’s a big deal, and that’s what started to ignite the deferred live cattle futures in the back end of last year, when the country saw we were short.”
Stewart said that’s when feedlots began to look at prices and saw they would be profitable in August/November/December, so they went ahead and hedged those prices, but then had to place cattle against them.
“For the first five months of the year we placed cattle very aggressively, and that’s what drove those spring calf prices as high as they went,” he noted. “Now what’s happened is seven-dollar, and almost eight-dollar, corn, which has taken the steam out of the deferred live cattle futures. That signals placements to stop, because if you buy cattle and hedge them, you’ll hedge them at a loss, so we’ve got a bulge going through the snake right now.”
Stewart said he expects to see placements begin to fall below year-ago levels.
“From now through July we’ve got a lot of cattle coming off feed, and we’ve got a lot of cattle to get through right now,” he explained. “A lot of the optimism has gone out of deferred futures, so that tells me not to get anxious about contracting calves right now.”
Although the market has taken $20 off calf prices in the last six weeks, Stewart said once the “bulge” gets through, and if the low deferred prices continue, and if placements are held off a while, the market could realize in August that things are more short than everyone thought.
“That’s my take on what the data’s telling us regarding the prices,” he said. “I think there will be opportunities in mid- to late-summer, and into the fall, to get some of the optimism back that we saw this spring.”
Stewart said, in a time of high-priced corn, it’s a great time to have green grass, because the market will pay producers for weight.
Of carcass weights, he said, “As long as fed prices are higher than break-even, we’ll continue to grow cattle bigger. Our cattle weights last spring were around 1,350 pounds, while in 2002 and 2003 1,200 pounds was the max. I don’t know how big the cattle can get – I don’t think we’re there yet, and we’ll continue to push in the name of efficiency as these markets try to seek more production.”
Regarding beef demand, Stewart said that’s the aspect that nobody truly understands.
“I’ve come to the conclusion that we have consumer demand and virtual demand, or the number of speculative contracts in the cattle futures,” he stated. “We have a lot of investor demand – they want to have money in these markets. We’ve got millions of dollars that want to be in commodities, and when they think they’re all going up, there’s no tomorrow and they run these prices up. But when we turn that thing south, those guys take the steam off the market really quickly.”
“We went from representing six million head of cattle in those contracts to 14 million virtual cattle, and I don’t think it’s a bad thing to have that much money that wants to be long in our market, but they’re a spooky bunch,” he added. “That’s something to consider when using the futures market – it’s not about fundamental supply and demand anymore. You’ve got to gauge the sentiment of investors as well, and I think that’s a lot of what’s happened in the last six weeks.”
Of fed cattle prices, Stewart said that from the 1970s to 2004/2005 there was an established range.
“Over most of the last decade we’ve jumped into a new and higher range and on to where we’re at today – are we finding a new range? I’d say yes, because I don’t think we’re going back to two- and three-dollar corn. Did we find the high at $1.20?” he asked. “We’re probably in a new world when it comes to fed cattle prices, which translates right down to feeders.”
He added that, if things go wrong on two or three different fronts in the remainder of 2011, it’s possible that risk could fall back into the mid-$90s, depending on the 2011 corn crop.
“The market to watch this year is corn, and that market cares deeply about moisture in the Midwest, and right now we’re 86 percent planted in the nation, behind both year-ago levels and the five-year average, so that makes corn buyers very nervous. We’ll have to have a perfect year to hold it together. If we have a fantastic growing season and great yields we could have some scorching prices this fall on cattle, and if we don’t, all bets are off.”