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A Rare Spring Storm Provides Cattle Market Support
First it was rain, then cold, and finally wind and snow that wreaked havoc for many cattle producers this past week in key states where most feedlots are located. The futures market wasted little time reflecting these concerns through higher prices. Not only did futures move sharply higher, product values experienced sharp gains as well. The timing of snowfall couldn’t be much worse, with cattle already cold and soaking wet. Feedlots turned into mud yards. Lack of weight gain, death loss, and increasing worries about disease are what cattlemen have been faced with this past week.
Was weather really a big problem? It is estimated that roughly 70% of the nation’s feedlots were affected in some capacity. Perhaps more importantly, cattle on pasture and death loss (due to cold temperatures and wet snow) affected small calves. With the calving season behind most producers, the last thing they needed to see is a nearly worst-case weather scenario for their young livestock. It is likely that long-term supplies will be affected, at least to some degree. The most recent weather pattern, however, follows other events that aligned to propel cattle prices higher.
There are a number of other reasons for the sharp upturn in cattle prices. As futures move higher, technical buying can increase. Until there is a signal on price charts to sell, buying often continues. In addition, short covering can occur. What this means is that, as prices advance, those short (or sold) the market have a tendency to exit. They do this to exit positions that may be losing money. This buying adds to upside price pressure. If you have been hedging by selling on the board lately, you probably have been experiencing margin calls. As prices advance, additional margin money is necessary. If this becomes uncomfortable or if margin money is limited, this may lead to buying back contracts, adding additional upside price pressure. Even though higher prices should suggest sales should be made, fears of margin calls and “being wrong” can create an environment where producers stay out of the market. Another reason for buying could be add-on positions. New buying can occur as those who are already long the market and making money find it easy to buy more, adding to their position.
A recent scandal in the Brazilian meat packing industry, in which tainted beef and corruption were primary issues, resulted in exports from Brazil (the world’s largest beef exporter) spiraling downward. With a weakening U.S. dollar, U.S. exports have increased more than 20% from a year ago. Adding to this positive backdrop is the Trump Administration focusing on trade deficits. Recent communication with China to import more U.S. products was the primary topic when China’s president visited the U.S. in early April. Another reason for higher prices has been the premium of cash prices to futures. This encourages producers to move cattle sooner than usual, creating an environment of lighter-weight animals. Lastly, it is the time of year when consumers typically head outdoors and enjoy the start of the grilling season. It is not unusual for retailers to stock up on beef inventory in March and April.
Occasionally, markets make large moves, and this often comes on the heels of a number of variables that align to support the move. Most of these are unpredicted and not visible until they occur. They have a tendency to feed on each other, and with hindsight, it looks easy. The rally in cattle prices has occurred in the face of expectations of increasing supplies throughout late spring and summer. Monthly Cattle on Feed reports indicated increasing supplies for mid to late summer. Now is not the time to back away from marketing principles. Rallies should be viewed as opportunities to shift risk. In strong up-trending markets, consider purchasing put options. Puts establish a price flooring mechanism, yet leave the top side open for price advances. Consider this for both the live and feeder markets.
If you have questions, comments, or would like a feed-buying strategy for your operation contact Top Farmer at 1-800-TOPFARM, 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.