Alberta fed cattle were trading in the range of $137 to $138 in mid-October, up approximately $4 from average September values. Beef production during October appears to be coming in lower than anticipated. At the same time, retail and restaurant demand appears to be coming in higher than expected due robust consumer spending.
Looking forward, April live cattle futures appear to be incorporating a risk premium due to the uncertainty in 2018 first-quarter beef production. Therefore, feeder cattle prices have also ratcheted higher over the past month. In central Alberta, larger-frame medium- to lower-flesh black steers at 925 pounds traded for $193. Calves averaging 525 pounds have traded as high as $245 while 350- to 400-pound calves have reached the magic $300 level.
Feedlots have bid up the feeder market so that there is very little margin in the deferred positions, which is a characteristic of a true competitive market. I’ve received many calls from cow-calf producers in regards to a placing a position on the livestock insurance program. Buying the insurance too early can be costly and you don’t want your risk management program to consume all profits. I’ll briefly review the market structure with some ideas on buying price insurance.
The USDA lowered its 2017 third- and fourth-quarter beef production estimates on their October WASDE report. Marginal declines were also noted in the first and second quarters of 2018. The weekly slaughter is coming in lower than anticipated and carcass weights continue to come in below year-ago levels. Earlier in September, the market was factoring a worst-case scenario for beef production. However, now that production is lower than anticipated, the market has room to breath and move higher. The main point is the market is not getting more bearish but rather looking neutral to bullish.
During 2016, wholesale beef prices made seasonal lows in November then started to strengthen in January. This fall, the seasonal lows were likely made in late September. Weekly data points that wholesale prices are now starting to trade sideways. Choice product has actually improved but Select product is about the same price as last month. Again, the main point is that prices are not deteriorating but stabilizing. This is another reason not to be bearish on the market.
From a demand perspective, there are factors that will influence the market over the next four to six months. November and December are periods of seasonally strong demand given the holiday season. As well, the U.S. economy is running full steam and continues to improve.
The price insurance program is based off the options for live and feeder cattle futures. Producers often have little idea of what the “smart money” is doing in the futures market. For this information, we have to look at the Commitment of Traders report, which comes out every Friday afternoon and shows the data as of close the previous Tuesday. The report shows how the combined position of commercials (packers, large feedlots, merchants), the managed money (large speculator) and non-commercials (small speculator).
With Live Cattle Futures the net long position declined from June 12 through to Sept. 4, reflecting that these players were net sellers. From Sept. 12 forward, the net managed money position increased, reflecting that they have been net buyers. In mid-September, there was a week that the commercials and the managed money were both net buyers. This is a signal the market is turning and you don’t want to stand in front of a freight train, never mind buy price insurance.
The fundamentals warrant firmer prices into the early winter period. Producers need to watch the Commitment of Traders report so that they have a good idea when to buy their price insurance.