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A healthy dose of caution

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Well-known member
Feb 11, 2005
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Good Jog Steve........great article! :)

A healthy dose of caution

by Steve Cornett

As the summer of 2005 hits the downhill slope, things are going well in cattle country. The rainfall amounts were good in most areas. The cattle market shrugged off the mad cow scare, and scoffed at the prospect of new imports from Canada and the possibility that exports would rebuild slowly. It is, in fact, a time when you could be lulled into thinking that there will never be another bad day. In addition, the economists say, it looks awfully good for this year and a little further down the road.

But. Economists always have a "but," don't they?

It's that "but" that makes Bob Price (page 6) suggest that readers keep themselves open to any chance to lock in a price on this year's calf crop or the grass cattle bought in the spring.

This fall, the market gurus look forward to the improved range conditions in cow country and our current position in the cattle cycle. What they worry about is the ongoing problem with exports, the threat of a court-induced dam break of feeder cattle, calves backed up behind the Canadian border, the escalating supply of cheaper pork and poultry, the retail price of beef and the certain knowledge that even cattle feeders aren't crazy enough to bid their way into ruinous breakevens forever.

To a producer, they suggest caution for anybody expecting to sell cattle this fall.

The best of it? Chuck Levitate at Learn Trading cautions that we probably have seen the high point for calves and feeder cattle for this cycle. He suspects that by the time the fall runs hit the markets, cattle feeders may be having second thoughts about placing cattle with a $85 to $95 breakeven point. He also frets about what happens if the border opens to Canadian feeder cattle.

Price and Levitate recommend watching the board for hedging opportunities or being ready to accept reasonable contracts. No one seems certain the market will see any great breaks as the days shorten, but they see enough risk of a serious slide to keep them edgy.

Maybe the scariest is that Canadian thing. Cattle have been backing up there for years now, and their national cattle population is at an all-time high. The beef from their fed cattle has been making its way into the U.S. market despite the ban on live cattle, so the big impact if the border is reopened would not come from fed cattle or beef—but from the feeders that have been growing larger.

While the U.S. has continued to cull cows during the BSE ban, Canadians have had little reason to do so. Cows have almost no value. There is not much to do with grass but hold onto cows and hope things get better.

If the fed-cattle do come this fall, they will be moving into an already well-supplied market. The reduced feedyard placements this summer and spring signify that a lot of cattle spend extra time in the countryside putting on pounds that will reduce their individual breakevens, but also add to a bountiful supply of feeders later than usual.

On top of the extra days, a lot of producers say more widespread rains this year will mean heavier weaner calves and faster gains on summer stocker cattle.

In fact, Jim Odle at Superior Livestock Auction, perhaps the best-wired auction operation in the country, says he hears that yearlings in some northern areas that typically gain 1.7 lb. to 2.2 lb. a day were coming off earlier this summer with 2.4-lb. to 2.9-lb. gains. That's good news for whoever owned them, but it does add to the beef supply.

Bob Wilson at www.HedgersEdge.com is among those who advise folks with fall cattle to deliver to "hedge 'em or contract 'em or somehow get 'em gone" at an opportune time.

Wilson says a lot more cattle are being contracted now than a few years ago. He says that more informed producers are more inclined to use forward contracts.

And, he says, there are devices that make forward contracting much easier than it used to be. Combine that with a more sophisticated producer, and hence, more capital at risk and a willingness to accept lower per-head profits on larger volumes, and you have the basis for a change in marketing procedures.

Winds of change. Neither Wilson nor Odle suggest there has been any sudden switch, but they say there has been a "drift" toward more forward contracting. As Odle says, "we have more cattle for fall delivery this year. . .but we're growing every year."

As cattle feeders have found, when more cattle drop out of the cash market because of forward contracts, the result is more volatility in the residual market of those that "have to go" at any given time.

If you buy into that line of thinking, a packer who has enough cattle contracted to keep his doors open next week is not as aggressive of a buyer this week. The same holds true for the big corporate feedlots.

One reason feeder prices have been so strong this year relative to fed cattle futures is that so many yards are chasing cattle. They can "afford" to bid extra for cattle because they have overhead to pay whether they own cattle or not. When you see feeders selling with breakevens of $90 against a board that offers $82 or even $85, some of that is cattle feeders' historic optimism and fat pockets.

But another, perhaps just as important, part is the fact that there is an increasing amount of demand from feeders who "have" to have cattle. You've got to figure that as more cattle are sold via contracts, those feeders holding those contracts are going to be less aggressive. As Wilson points out, feeders have had an unusually long spell of profitability. Their wallets are full of money they made on cattle the smart guys said shouldn't be bought.

"A lot of them say, 'I proved you wrong last year and I can do it again this year'," Wilson says. Maybe so. But to quote all the economists, "but." But if you stack all the questions posed by the cattle market on top of each other and then you add the possibility of, say, a short corn crop and maybe more BSE problems, and if you compare all that to the upside potential… Well, it looks like a good time to be a willing negotiator on those forward contracts.

No buts about it.

For more information:

Chuck Levitt
[email protected]
(630) 736-5546

Bob Price
[email protected]
(312) 756-3577

Bob Wilson
(888) 220-3344
...the one thing that happened up here in Canada is that the cow herd grew... but if any these guys took the time to look at our carcass weights...they would see they have not went up...if we were holding feeders longer the carcass weights would have gone up... on another note after the feedlots up here took their original kickin after May 20/03... have bought light feeders where there was positive margins... another reason to have kept their lots current...

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