Price discovery

Opinion
Aug 2, 2013

Fed cattle markets have been pretty dull this past July. The cash price for fed cattle was $119 every week of the month. Futures markets have also been dull, with the August contract staying in a $3 trading range for the month. We know that July is typically the hardest month on the fed cattle markets but I’m starting to wonder about price discovery in the fed cattle markets.

There has been more discussion from market watchers about price discovery and this current market. Feeders in the Southern Plains have, for the most part, shied away from selling cattle on the cash market. I understand the large feeders have a much bigger job marketing cattle and need to use formula trading and other contracting tools just to get the volume moved. It would be a challenge to have a fresh show list each week in the 25,000-head range like Cactus Feeders or Friona Cattle Feeders do.

But when many formulas have a cash market component tied to them, it seems that feeders would be more active trading a portion of their show lists on the cash market to establish that base price. For instance, the week of July 29, Southern Plains feeders traded just 2.2 percent of their cattle on the cash market; the average price for that week was $118.94 on the steers. Nebraska, on the other hand, traded 39.6 percent of their cattle on the cash market and had an average steer price of $120.92. Nationally, 22.2 percent of the live cattle were traded on the cash market $2 higher. However, I do realize that cattle in those regions can vary quite a bit and quality will affect those prices.

Is the fed cattle market sick? From my perspective, it certainly isn’t as healthy as it should be with the low supplies of cattle. Beef demand isn’t bad, but it’s also not the best it could be with the sick economy that many consumers are enduring.

Feeder cattle markets, on the other hand, have been robust and price discovery is not an issue. Just watch one of the market-making summer video sales and it will tell you all you need to know; competitive bidding works very well.

The futures markets are one of our price discovery tools, but it is also a sick market. Open interest through summer has been as low as it has ever been. Last week there was open interest of only 283,568, which was higher than it was two weeks ago.

Troy Vetterkind of Vetterkind Cattle Brokerage has been critical of the Chicago Mercantile Exchange recently and said, “It’s the end of the month trade today and first of the month trade tomorrow, so maybe we can get a little interest back in trading cattle so we can break out of our month long trading range of $121-$123 in August and $125-$127 in October live cattle. Or maybe market participants are just so sick and tired of years of mismanagement of the agriculture commodity markets by the CME officials and want no part of the 23 hour diluted livestock trade that is raped an pillaged daily by high speed algorithm trading firms that we just sit here in this same trading range for another month. I guess time will tell what we’re going to do here. Regardless, probably the best trade in cattle futures market is no trade. Hedgers that need to do some risk management would be encouraged to utilize put options as option volatility is unbelievably cheap due to the inactivity in the futures market.”

Feeder cattle markets continue to be red hot. The CME feeder cattle index was $3 higher last week compared to the prior week. Cattle feeders are hungry for those summer yearling cattle. We’re seeing eight weight cattle trading in that $150 range again.

The corn crop is looking to be a big one with several analysts looking for a 14 billion-bushel crop and this is pushing corn prices downward; the December corn contract is at $4.67, allowing cattle feeders to pay more for feeder cattle. Some market analysts are projecting fed cattle prices to start moving higher on the Labor Day market and expecting to see cattle trade in the low $130 range later this fall as rib demand develops for the holiday season.

Even though the beef and live cattle markets are flat, prices should start to improve. Many analysts are saying that the summer low is in and that we’re on the cusp of a turning market. The summer low was only 8 percent lower from the spring high. In other words, the live cattle market didn’t fall the typical 15 percent. — PETE CROW

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