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Analyst: Cattle Producers Should Stay on Alert

A recent recovery in cattle prices (as of this writing, a rally close to $10.00 above recent lows) has many in the cattle industry breathing a sigh of relief. Yet, one has to acknowledge that the supply of cattle continues to remain large. In spite of good export activity this year, the supply of red meat available to the market is a concern. Increased production in pork and poultry will also weigh in the mix for consumers as they have plenty of choices. Beef needs to move lower in the retail sector to gain additional domestic demand.
 
Year-to-date slaughter is 5% higher than last year with year-to-date beef production up 5.1%. Pork production is showing an increase of just under 1% for the year and chicken slaughter up 1% as well.
 

The technical picture is a classic bearish market with a series of lower highs and lower lows. The long-term cycle shows cattle peaking in October 2014. Feed became more readily available and cheap by late 2013, likely triggering herd expansion in a more aggressive fashion. These factors suggest a sufficient amount of cattle available to the market in the foreseeable future.
 
Therefore, demand has to improve, or prices have to move lower, or both. We believe both are likely, and consequently, this means there is risk to the downside for cattle producers. Rallies should be viewed as opportunities to shift that risk.
 
There are multiple tools available at your disposal to accomplish this task. Forward contracting, purchasing puts, or using fence strategies (purchase a put and sell a call) are three that should be examined.
 
The bottom line is that it’s OK to breathe a sigh of relief, however, we don’t believe this market is out of the woods yet. On a positive note, exports are up over 10% year-to-date, however, we’re still concerned that prices have room to move lower, and can quite easily. This is evident on previous rallies which have failed. Bottom line, be prepared.
 
If you have questions or comments, or would like help in creating a balanced strategy for your operation, contact Bryan at Top Farmer Intelligence (800-TOP-FARM, ext. 129).
 
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

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