Source: Matthew A. Diersen, Professor, Department of Economics, South Dakota State University
The high cash prices and high nearby futures prices have been the talk in the fed cattle market. The historically tight supply of cattle is supporting prices. In addition, the feeder cattle market is seeing solid demand and some limits to supply as producers weigh the longer-run benefits from retaining heifers. Whenever rallies happen, it is a good idea to check the opportunities in the related forward contract market. A good source for that information is the USDA-AMS report “LM_CT153”, which covers weekly fed cattle volume contracted with related basis levels.
Recent weeks also encompassed the federal shutdown that caused a loss of current market information. The weeks leading up to the shutdown were marked by increased forward contract activity and a steady increase in the total or cumulative volume outstanding. Conceptually, it is like futures volume and open interest. After reaching a low in early July 2013 at 833,237 head, the outstanding volume increased to 1,387,554 head in the 09/29/2013 report. During the shutdown, the AMS did not convey the information mandated by the Livestock Mandatory Reporting Act, but it was collected and submitted by packers. On October 21, 2013 the AMS released the backlog of information.
Did the absence of reporting matter? It is difficult to tell. For the first two weeks in October, the new signings totaled 167,115 head, which suggests a slower pace of contracting compared to the surrounding weeks. However, volume changes are common in October. More interesting was what happened to forward basis activity. During the last week in September, the average basis for April 2014 was -$1.51. During the shutdown, the average basis narrowed to -$0.98. The basis increase would not have been transparent. As might have been expected, the basis range for April deliveries did not change, suggesting that both parties tried to roll things ahead during the shutdown.
Aside from the shutdown, the total volume contracted has again been on the increase. The most recent report (10/28/13) shows total volume is 1,539,781 head. For the April 2014 delivery month the volume is ahead of year ago levels. This suggests the forward contract share of slaughter volume in the coming months will increase. While most of the contracts outstanding have delivery months out for the next six months, there are some as deferred as January of 2015.
Formally “LM_CT153” is titled, “National Weekly Direct Slaughter Cattle: Prior Week Slaughter and Contract Purchases” or “Weekly Direct Slaughter Cattle – Packer Owned Cattle”. The report gives the weekly volume (number of head) of new forward contract signings between feeders and packers. AMS also tracks the cumulative volume and a breakdown by delivery month with an average basis and a basis range of the related futures contract. The report is available at: http://www.ams.usda.gov/mnreports/lm_ct153.txt
More data are starting to trickle in. Most of the movement this past week was consistent across classes. Higher boxed beef moved through to higher fed steers. Lower corn was bid into generally higher feeder prices and higher calf prices.