The U.S. Department of Agriculture’s annual cattle inventory report confirmed what every cattleman suspected — supplies of stocker and grazing cattle will be short this year. Typically that means higher prices, and the first couple of weeks of 2013 saw a rally in stocker and feeder markets. But much of February found buyers sitting on their hands at many auctions.
Market analysts say two major factors have played into this year’s cattle markets: the prospects of continuing drought across the Central Plains, and the reality that feedyards continue to struggle with heavy losses.
“Producers need to keep in mind the margin environment of the segments above them,” says Cattle-Fax market analyst Lance Zimmerman. “The losses have come to feedyards consistently now for the better part of 12 months — more or less three turns of cattle have been losing money. Packers are in a similar profit struggle recently, and that means it is going to be difficult for the feeder market to gain momentum in the fashion that it has in previous years.”
That negative margin environment is typically destructive to feeder-cattle demand, and it presents a real risk to the 2013 feeder-cattle market. As producers look to buy cattle, Zimmerman says, they need to know their breakeven cost of production and have a risk-management and marketing strategy ready to execute.
“August feeder-cattle futures prices are at $153 per hundredweight and the average Kansas 550-pound steer received bids around $170 per hundredweight,” Zimmerman noted in late February. “That dictates the gross margin for those calves at $350 per head after accounting for historical basis. That suggests a breakeven cost of gain at $1.16 per pound before accounting for interest, health expenses, labor and freight. Most producers can make that work in their favor — if we get rains that provide adequate pasture to run stockers through the summer months. Hedging can provide the protection they need, and buying puts can be beneficial to lock those prices in and allow some top-side price flexibility.”
Stocker operators must also make a determination of what they believe the market opportunity will be in August. Zimmerman says those cattle have the potential to be marketed as early as December if they sell in early August, which means the Choice/Select spread is typically at a high. Quality considerations regarding health and genetics of calves purchased now could provide more opportunity for higher prices into that late-summer marketing time.