Source: John Michael Riley, Extension Economist, Department of Agricultural Economics, Mississippi State University
Over the past few weeks, feeder cattle futures contracts have converged to what might as well be a single price, no matter the contract expiration month. In other words, there appears to be no seasonal influence in the market of late. This caught my attention especially given the current supply situation in the industry and, even more importantly, the longer-term expectation that feeder cattle supplies will further tighten.
The figure below shows the spread across all available contracts for a 12-month period (i.e., the difference between the highest contract price and the lowest contract price on the same date). While this is a crude measure, it does provide a quick assessment of the market conditions. Typically, at any point during the year, the spread between all contracts is roughly $5 per hundredweight. When 2013 started the spread was well above the highest seen when looking back through 1995 at about $15 per hundredweight and eclipsing $20 per hundredweight at times. Once the spring contracts expired, the spread dropped to just under $10 and drifted lower. Currently, the spread is near the lows from 1995 through 2012 at about $2 per hundredweight.
So, what does this mean? Live cattle futures contract prices are more differentiated and have a more typical seasonal pattern in place and do not appear to be an underlying reason for the narrow spread for feeder futures. One explanation could be that corn prices have declined, which has helped lift feeder futures prices across the board. This appears to have led to larger increase for nearby feeder prices while more deferred contracts wait to see what next year’s crop looks like. Even so, in the winter and spring of this year the most deferred contract was at a significant premium to the nearby contract. This was not surprising at the time given the expectation of tight feeder supplies moving forward. While this is still the case, for the most part, the fact that the spread has narrowed is indication of the uncertainty of future feeder cattle demand since there is not a “time” premium currently in place.
Cash cattle were mostly steady this week. The five-area live and dressed steer price finished the week at $130.85 and $205 per hundredweight, respectively, down $0.10 and $1.04. Feeder steers in Oklahoma sold about $1 lower and calves were about $1 higher. Choice beef averaged $202.25, down $2.22, and Select averaged $188.50, down $1.49. Corn prices erased the bulk of the strength from the aftermath of the very bullish supply and demand report. Despite increased demand expectations, traders recognize that a large crop will be harvested. To close the week, the Environmental Protection Agency indicated they would lower the allowable amount of ethanol to be blended with petroleum based gasoline from 18.15 billion gallons to 15.21.