The Richmond Register

Lifestyles & Community

July 16, 2014

Kentucky beef cattle market remains strong

RICHMOND — The feeder cattle market shows no sign of weakness and seems to shrug off most anything that could potentially be seen as negative.

At the time of this writing (July 8), feeder cattle futures contracts through the end of 2014 were trading above $217 per cwt.

The August contract has increased by more than $35 per cwt since March. Fall contracts were actually trading at a slight discount to August, which is unusual as August is typically the peak of the feeder cattle market.

Two developments have worked to strengthen what was already a record setting market this summer.

First, the fed cattle market didn’t experience the seasonal low typically reached in the summer. Fed cattle prices actually increased when they typically decrease. As that happened, deferred live cattle futures moved upwards, supporting feeder cattle price levels. The December 2014 live cattle futures contract has moved from the upper $130s in early April to the mid-$150s at the time of this writing.

Secondly, the increase in live cattle prices coincided with a significant decrease in corn prices. A combination of higher than expected acreage and favorable weather moved both old and new crop corn prices from the low $5 per bushel range to the low $4 per bushel range.

While the two major drivers of feeder cattle prices (live cattle futures and corn prices) have both worked to support the market, it is hard to imagine feeder cattle being worth more than $35 per cwt above what they were this spring.

For producers targeting fall feeder cattle sale, a key question will be whether the market was severely undervalue then or if it is overvalued this summer.

This market also has illustrated a risk-management truth that is becoming more apparent all the time – these markets are impossible to predict and risk management is becoming ever more important.

For the third straight summer, we have seen major swings in feeder cattle prices.

Feeder cattle prices dropped drastically during the summer of 2012 as the severe drought pushed up corn prices. Then they rose in 2013 just as much as the fell the previous year because a massive corn crop led to much cheaper corn.

This year, the combination of factors discussed above has created the hottest feeder cattle market ever seen.

I have often shared that my philosophy on risk management put protecting the downside first, while worrying about the upside later.

However, a market such as we’ve seen in 2014 drives home the importance of keeping upside potential in mind.

Producers who purchased put options or used synthetic puts this summer have done much better than those who forward contracted or sold futures.

(Source: Dr. Kenny Burdine, University of Kentucky Livestock Marketing Specialist)

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