Category: Livestock Marketing

Cattle markets finished October on a weak note with the CME Feeder Cattle Index around $237 per hundredweight. This price represents a $17 per hundredweight decline compared to the peak value, which occurred in September. However, the decline in prices is not the worst of it. The worst of it was that many cattle producers missed out on the opportunity to hedge cattle to be sold in the fourth quarter of 2023 and the first eight months of 2024 and will likely receive lower prices.

Traders and market participants clearly had high expectations for feeder cattle as can be seen in Figure 1 with most contracts finding their life of contract high in September. Most contracts are $20 to $30 off their contract high as of this writing with more weakness evident in the market. Despite a favorable opportunity to hedge the sale of cattle in September and early October, not all hope is lost. One could easily compare the Christmas tree in A Charlie Brown Christmas with cattle market prices, but most would look at it from the glass half empty perspective instead of the glass half full perspective. One could certainly sulk in the losses and the missed hedging opportunities, but one must remember that markets are still alive just like the Christmas tree Charlie Brown chose. This means there are opportunities for gains in the current market.

The first aspect to consider is that feeder cattle futures are still offering a favorable price to hedge the sale of feeder cattle through most of 2024. If a profitable price can be achieved with current futures prices, it could still be a wise move to secure those profits. If there is concern of missing out on larger profits if the market price strengthens, then there are strategies using put and call options to capitalize on a stronger market. The primary objective is to be an active marketer instead of passive.

Figure 1. Daily feeder cattle futures close price by contract month.

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Griffith, Andrew P. “A Charlie Brown Christmas for Cattle Prices.” Southern Ag Today 3(46.2). November 14, 2023. Permalink

Price risk management for beef cattle producers is an important tool in navigating cattle markets. As last week’s Southern Ag Today article on livestock marketing showed, many more producers are using Livestock Risk Protection (LRP) insurance, which correlates to program changes and a run up in cattle prices. LRP and many other price risk management tools, including futures and options contracts, mitigate futures price risk, however, it does not set the actual cash selling price for a producer. The difference between the cash price and the futures price is called basis. Basis varies from year to year, by time of year, location, weight class, and other factors.

Figure 1. Range of Basis Values for 500-600 lb Steers in Georgia and the Average Range of Feeder Cattle Futures Prices, 2018-2022

Source: LMIC using data from USDA-AMS and CME Group

LRP and other price risk management tools that lock in a futures price still leave the producer exposed to basis risk. Producers are often more comfortable with taking on basis risk because basis risk is generally much smaller than futures price risk. Figure 1 presents the average range of monthly basis values and feeder cattle futures prices by month over the last five years for 500-600 lb steer calves in Georgia. As seen in Figure 1, the range of futures prices is much larger than the average range of basis values. Data from other states show similar gaps between basis variability and feeder cattle futures price variability.

LRP, futures, options, and other price risk management tools provide protection from futures price changes but basis fluctuation may still affect the final cash selling price making it important to understand basis risk and to include it when making risk management decisions.  

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Secor, Will. “Understanding Basis When Managing Feeder Cattle Price Risk.” Southern Ag Today 3(45.2). November 7, 2023. Permalink

Producers across the United States and the Southern States are increasingly adopting the Livestock Risk Protection Program, commonly known as LRP. This program, which is designed to protect ranchers against falling cattle prices, has witnessed a remarkable surge. From a mere 71 thousand head covered in 2017, the usage of LRP has increased rapidly to 5.2 million head by October 2023. In 2022, ranchers insured 3.4 million head, up from 1.8 million in 2021. Ranchers’ use of LRP in the Southern region has contributed significantly to this growth (Figure 1). As of October 2023, ranchers have insured approximately 1 million head annually through the LRP program, with Texas and Oklahoma insuring 56% and 34% of this total, respectively.

Figure 1: LRP Usage in the Southern States

This increase occurs alongside increases in subsidy levels and other changes to LRP and the significant improvement in the market feeder and live cattle prices (Figure 2). During 2019 and 2021, the USDA introduced several modifications to the LRP program. These changes not only reduced the producers’ portion of premium payments but also allowed them to defer premium payments until the end of the endorsement period. The option to pay premiums at the ending date offers ranchers a considerable cash-flow advantage. Another benefit of the LRP program is it doesn’t require a minimum number of cattle to be insured, meaning cow-calf or stocker producers with just a few head can use it.

Additionally, the rise in cattle prices has emphasized the importance of implementing a solid price risk management plan. LRP can help minimize financial losses, secure profit margins, and reduce the risk of business failure, particularly in the face of higher investment levels. The increased adoption of LRP reflects a growing number of ranchers who are utilizing risk management plans in their operations.

Figure 2: LRP Head per Year and Feeder and Live Prices per Month

Source: USDA – RMA. Livestock Risk Protection Participation. https://www.rma.usda.gov/Information-Tools/Summary-of-Business/Livestock-and-Dairy-Participation

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Abello, Pancho. “Producers Embrace USDA’s Livestock Risk Protection Program.” Southern Ag Today 3(44.2). October 31, 2023. Permalink

The latest Cattle on Feed Report raised some eyebrows, showing a slight (0.6 percent) increase in feedlot inventory from last year. Placements of cattle on feed were up about 6 percent driven by higher 700-900 pound placements. In the current setting of tighter supplies and smaller calf crops, many might be rightfully surprised to see an increase in cattle inventory numbers. However, there is plenty to unpack in this report that has both short-term and long-term implications for cattle markets. 

My first big takeaway is the strong number of heifers on feed. The quarterly breakdown of steers vs. heifers on feed was released with this report and showed that 40 percent of feedlot inventories were heifers. This is the highest percentage in over 20 years and indicates that producers continue to send many heifers to feed instead of retaining for reproduction. There are two sides to this: (1) heifers are helping to boost inventories now which could be viewed somewhat negatively for prices in the short term but also (2) fewer heifers retained means a smaller calf crop next year which can be viewed as supporting high price levels in the longer term. To me, this report shut down any ideas that herd expansion is happening or will happen in 2023, that discussion will shift toward whether expansion occurs in 2024. 

The increase in placements is interesting because it likely reflects producers selling now to take advantage of strong markets but also some producers being forced to sell feeder cattle a little earlier than expected due to expanding drought in many areas. Looking ahead at price expectations, it is worth noting that the current strong market prices have not really reflected herd rebuilding efforts yet. The rebuilding phase will include holding back more heifers which will mean fewer heifers sold as feeder cattle. Combined with smaller calf crops as a whole, this will be the point when feeder cattle supplies get really tight and prices have the strongest supply-side support. 

While the vast majority of beef produced in the U.S. is consumed domestically, international markets are a significant piece of the U.S. beef system. For perspective, the U.S. exported the equivalent of about 12.5% of its beef production during 2022, while importing roughly 12%. This was a fairly typical balance of trade, especially for a year with high beef production levels like last year. However, as beef production is on track to see a significant drop in 2023, trade patterns are also being impacted.

Through August, exports of U.S. beef are down by 14% from the first eight months of 2022. A drop of that magnitude certainly warrants some question but is largely a case of year-over-year comparison being a little misleading. For the first two quarters of 2023, beef production was about 4% lower than 2022. With lower production levels, a larger share of U.S. production will be consumed domestically. Additionally, high price levels are also making imports of U.S. beef less attractive in many countries. For example, exports to our three largest destinations (South Korea, Japan, and China) are all down sharply so far this year.

The same factors that have led to lower export levels have also led to an increase in U.S. beef imports. Through the first eight months of the year, U.S. beef imports are up by a little over 5%. The largest percentage increases are in beef imports from Australia, New Zealand, and Uruguay, which are primarily sources of lean trim to go into ground beef. Unlike 2022 when the U.S. was a slight net exporter of beef, we are very much on track to be a significant net importer in 2023. Through August, U.S. beef imports have exceeded exports by more than 20%.

This trend towards increased imports and decreased exports is likely to continue for the next few years. Given that this calf crop is smaller than last year’s calf crop, beef production is likely to decrease in 2024. And given expectations for lower beef cow inventory next year, I would expect beef production to be lower again in 2025. The same supply fundamentals supporting strong cattle prices are resulting in a significant shift in the balance of trade for beef. And as beef supplies get increasingly tighter over the next couple of years, we are likely to see an ever greater divergence between imports and exports.

Burdine, Kenny. “Balance of Trade Has Shifted as Beef Production has Decreased.” Southern Ag Today 3(42.2). October 17, 2023. Permalink