Cowboy Christmas

Dec 23, 2010
Cowboy Christmas

Cattle markets have gone wild over the past couple weeks, with nice advances in last week’s markets for all classes of cattle. It appears that the managed money funds are back in the game and pushing both fed and feeder cattle contracts to new highs. Even though the cattle are the highest they have ever been, the beef sales certainly aren’t supporting live cattle prices at these levels. With feeder cattle trading at the $120 level and $6 corn, it seems to defy logic. The two markets have always been closely tied together, but with the corn and energy relationship, it suggests that fundamental logic has gone out the window.

When markets ignore the fundamentals, it always seems to create a problem somewhere. I don’t think anyone expected to see feeder cattle futures jump over $120, but the January contract was at $121.67, March is at $123.67, and March corn was over $6 last week. April fed cattle touched $111.05. The last time we saw the market advance this way, the bottom fell out shortly after. Remember 2008? It’s nice to see so much confidence in the beef and cattle markets, but it also makes us a bit cautious. I suppose you could call this a real cowboy Christmas.

The boxed beef cutout is at $158 and cattle processors had to pony up $104 on last week’s cash market. Cattle slaughter will be lower due to the holiday shortened week and we should finish out the year with annual beef production close to 26 billion pounds, up 1 percent over a year ago. The volume of cattle processed will come in around 33.5 million head, roughly 2.5 percent over a year ago. With this economy, this wasn’t supposed to happen. It turns out 2010 will be one of the best years for the cattle business in quite some time.

The latest Cattle on Feed report said placements were up 6 percent for November. Dry weather in wheat country really pulled the rug out from under many southern Plains stocker operators and wheat farmers who were forced to send those cattle to the feedlot, which is why the placement numbers were so high. Last November, there were 332,000 fewer cattle placed into feedlots than this year, however, placements were still below the five-year average.

With all those light calves and no grass, it might make sense for some southern Plains stocker operators to look to the West Coast for grass.

California will more than likely not have enough cattle to use all the grass they have. Many California ranchers have said this is one of the best grass years they have seen in a long time. Last year was also a good year and there was lots of grass that was never used. Also, this past year, there wasn’t much of a basis on those West Coast yearlings.

Cattle on feed were up nearly 3 percent, but the number of cattle on feed for more than 120 days is 99 percent of a year ago. That number is expected to grow until the second quarter of 2011. With the April contract touching $110, we could see feeders try to add weight going into what would appear to be a stronger market. If it occurs, that could develop a little backlog of cattle. Futures market and the fundamentals appear to be at odds again.

The items that aren’t normal, but pleasing, are marketings, which were up 8.5 percent over a year ago. November included one extra slaughter day, accounting for some of the increase. said that the marketing rate was the highest it has been since 2002. Domestic markets appear to be slightly stronger than a year ago and the export market is still raging on. That has kept positive margins alive over the past six months across the industry.

Feeder cattle have advanced 27 percent in value from the low in 2009, which is amazing given the price of corn driven by strong global demand for grain. Many market analysts are expecting corn to go even higher, which would typically be bad news for cattle producers. The price of feeder cattle is starting to get a bit perplexing, and some are thinking they will go even higher despite the rise in grain prices. We know that we have short supplies of feeder cattle, but we never seem to run out of them. For cattle feeders, this has got to be a nerve-racking event, and I’m sure that the packers are scratching their heads. But for cow/calf producers, this is a great Christmas present. Merry Christmas! — PETE CROW