I receive many inquiries about the cattle market throughout the year, and in many cases, I realize the producer does not have a good handle on the fundamentals for beef or cattle.
Supply-and-demand projections appear to be a foreign subject for many. For example, I’ve received many calls asking why the cattle price has to go down if beef supplies increase. So I thought this would be a good time to review the main factors that drive the price structure for calves and yearlings. Feedlot operators tend to subscribe to some type of market analysis but most cow-calf producers and backgrounding operators feel that they are at the mercy of the market.
They need to be aware of two main factors when selling calves or yearlings. The first is the input costs or the costs per pound gain in the finishing feedlot. Secondly, they need to be aware of the fed cattle price when the animal will be sold for slaughter.
For example, a 600-pound calf or an 850-pound yearling will be finished at different times and the fed cattle market can change quite significantly over the course of three or four months. Finishing cattle is a pure competitive market so feedlots will bid up the price of feeders so that there is minimal if any margin. Cow-calf producers and backgrounding operators can pencil out the expected margin for finishing the feeder cattle and this can be helpful to determine if the feeder market is over- or undervalued.
The supply and demand for barley or corn is readily available from many sources. After making a few calls or doing some research, one can find out the cost per pound of gain for variable and total costs at the finishing feedlot.
It’s all about supply and demand
Understanding the supply and demand for fed cattle takes more work. For starters, the cow-calf producer or backgrounding operator can look at the live cattle futures and subtract an average basis to get an indication of the fed cattle price when the animal is finished.
Government agencies and private analysts like myself provide projections for monthly and quarterly beef production. Monitoring the changes in beef supply projections should be done regularly. If finishing feedlots are factoring in a tight supply for a certain period, they’ll be more aggressive with their feeder cattle purchases. However, if beef supplies are expected to be burdensome at some point in the future, the buyer will incorporate a risk discount on the feeder cattle to allow for slippage in the fed cattle market.
In other articles I have discussed the scheduling of feedlot placements by weight category, which largely determines the number of cattle slaughtered and beef production during a specific month in the future.
Another factor to consider is that the live cattle futures have a characteristic called the “constellation of prices.” This is where the front month of the live cattle futures determines that direction or trend of the deferred contracts. I think many cattle producers realize that the deferred live cattle contracts mirror the nearby contract. If April live cattle are trading near contract highs, the August contract will also be trading near contract highs. If the August contract is trading near contract lows, the April contract of the following year will also be trading near contract lows.
Not much give in the market
I also want to point out that beef demand is inelastic, meaning a small change in supply has a large influence on the price. At a summer barbeque, a consumer will gladly have one hamburger but not likely two or three. An urban family tends to buy the same amount of beef each week. At some point, demand is full. Seasonal low demand for beef occurs in January and February and then again in August and September. Beef demand makes a seasonal high in March and April and then again in November and December. Wholesale beef prices reflect these changes in demand and the price patterns are similar from year-to-year.
The feeder cattle futures is the live cattle contract five months forward. For example, the March 2020 feeder contract will be heavily influenced by the fed cattle and beef fundamentals for August 2020. During August, finishing feedlot margins are usually in negative territory but the yearling market can be quite strong. The fed cattle fundamentals will be quite different in January and February the following year.
An old-time cattle producer once told me that you can work in the corrals all day long but the money made in the cattle business is made after supper by sharpening your pencil and doing market analysis. While cattle producers are price takers in a pure competitive market, understanding the fundamentals for feeder cattle and how they change throughout the year can enhance the bottom line and provide confidence when implementing a risk management strategy.