It’s volatile, so hedge

Jun 24, 2011

There is more volatility in the commodity markets. Two weeks ago, cattle markets were on a roll, gaining several dollars going into Fathers Day weekend with cash fed cattle trading at $108-109. Then the June 1 Cattle on Feed report came out and, the following Monday morning, the markets took off. It was starting to look like the summer low may have arrived early.

A very bullish Cattle on Feed report pushed June live cattle futures up to $113. The deferred contracts moved back over the $120 mark, giving feeders a hedging opportunity to lay off some risk. All the feeder cattle contracts early last week moved much higher with August feeders trading in the $138 range at midweek. That should have put a smile on the folks who consigned cattle to Superiors Week in the Rockies Sale, which started on Monday this week.

However, by last Thursday, all the momentum was gone from the market and June cattle fell back to $109 while feeders fell back to $135. The momentum came and went in a matter of four days. It has been a dramatic couple of weeks for ag commodities. Two weeks ago, corn futures had a wild swing, with corn trading at almost $8 a bushel, then positive supply news came out and the corn markets fell nearly $1.50 in just 10 days to the low-$6.50 range, giving cattle feeders some relief on feed prices.

I suppose cattle feeders have to ask the question: Is $6.50 corn as low as its going to be; do I lock some down at this price, or go hand to mouth? Last year at this same time corn was $3.50 a bushel.

The June Cattle on Feed report showed there were 4.1 percent more cattle on feed over last year. The good news was that market analysts were looking for 5.5 percent more cattle than a year ago. These guys dont like to be wrong by much. Placements were also a surprise, down 10.8 percent during May, which more than compensated for the larger-than-normal placements in April. Most of Aprils placements were due to drought conditions across much of the South, but feeders pulled back from adding more cattle, which would have been just adding losses to their balance sheets..

Marketings were perhaps the best news, with the industry moving 7.3 percent more cattle than a year ago with one extra slaughter day during the month. While this marketing number is positive, it also had many market analysts perplexed since actual steer and heifer slaughter was up only 3.1 percent for the month.

There is a lot of speculation among the market analysts. Could USDA have undercounted the marketings from prior months and be adjusting the numbers now? Some analysts are wondering if the cattle had been sold but not slaughtered. Others speculated that perhaps USDA just messed up. It happens.

There has also been some speculation that were seeing some changes in the farmer-feeder dynamic in the cattle feeding business. Feedlots under 1,000 head still account for 18 percent of the fed cattle sold. These feedlots are typically farmer-feeders. It has been suggested that there is less justification to feed $7 corn to high-priced feeder cattle. Also, the Environmental Protection Agency is starting to require small feedlots to have manure management plans, which can be costly.

Steve Meyer, economist at CME said: "Cattle placed in April were 161,000 head higher than a year ago, but then they declined 220,000 head in May. Placements in June and July will likely be quite restrained as feedlots are finding it increasingly difficult to realize a positive margin. The recent turnaround in cattle prices will likely provide a measure of relief, but live cattle prices are still far from where they should be to encourage placements."

Remember, there is still a shortage of cattle, and calf and feeder cattle markets are expected to be solid from here on out. Volatility will still be around and it seems that the faster the news travels, the more volatile the commodity markets will be.

Considering the volatility of these markets, it would be a good idea to explore some kind of risk management. Its not fun watching cattle prices swing $5-8 in a week. There was a hedging opportunity early in the week and it only lasted two days. It seems that these great marketing opportunities come and go quickly, and we know that there are more hedged feeders today than there were five years ago. PETE CROW