What is in this article?:
- September Cattle Market Outlook: Bull Run Cools, But Market Upside Possible
- Future cattle market possibilites
Cattle feeders have remained fairly aggressive when buying replacements.
Given the cattle market action from May through July, it almost seemed as if there was no stopping the bull run in the cattle market. Reality set in during August, however, with live cattle prices being subjected to a consolidating trend.
From a broad perspective, the August average was nearly identical to that established in July ($157 and $158, respectively). The averages, however, don’t really tell the whole story. More important are the details underneath the market, including the back and forth between the fed market and cutout values. And, after all is said and done, we’re back to where we were two months ago (Figure 1).
Stating July’s average at $158/cwt. overlooks the monthly peak of $163 and the $9/cwt. gain during the month. Similarly, August’s $157 average neglects the descent on the other side, as August gave up nearly $8 from the July-ending $163 to close at $154. Playing that out for a 1,350-lb. steer represents about a $230 swing/head ($120 up in July, and $110 down in August) over the course of just eight weeks.
Meanwhile, packers have faced the same challenge (albeit the timing worked to their favor in the past month). The Choice cutout started July at $247/cwt., after which wholesale beef prices surged to pull value all the way up to $262 during the first several weeks of August. That represents an increase in carcass value of approximately $125 for the same 1,350-lb. steer. However, during the past several weeks, boxed-beef prices have been under pressure, receding back to $247 as August closed business.
As referred to above, packers were able to play the swings to their advantage. Fed cattle prices were declining, while beef prices were improving in early-August, which allowed processors to score a run of several highly profitable weeks. Gross margin estimates averaged approximately $240 through August.
The inherent question within the weekly noise surrounds bargaining and marketing strategies. That is, why would feedyards give up so much leverage and sell into that type of scenario? That invokes a secondary consideration for cattle feeders: managing basis. Throughout 2014, basis (cash minus futures) has been strongly positive (Figure 2).
In fact, July basis was over $7 ahead of the 2010-2013 average. Meanwhile, August basis ran nearly $4 ahead of the average. Risk management strategies are typically predicated on historical basis trends; strong basis encourages active marketing into the pricing environment. Given that consideration, cattle feeders become increasingly indifferent to the week-to-week back-and-forth with the packer, and much more willing to sell into positive basis.