Cash, futures, product values up

Markets
Sep 27, 2013

The trend of a Friday trade continued last week; Packers might have done themselves a disservice in waiting as futures did nothing but strengthen throughout the week and they were said to have had short supplies of contract cattle around them. Analysts expected trade to take place late Friday at higher money compared to the prior week.

Andrew Gottschalk of Hedgers Edge said the battle ground on live would be $126 and dressed trade would likely come in at $198-200. Troy Vetterkind predicted $124- 125 for live in the South Plains and $125-126 live and $196-198 dressed in the Corn Belt.

Near term live cattle futures performed wonderfully last week. Compared to the prior Friday’s close of $125.95 for October and $129.75 for December, both contracts gained over $1.50 in the course of the week. The contracts settled last Thursday at $127.70 and $131.58 respectively.

But the high prices might be long for the world. Gottschalk called futures overbought and warned of a correction. Vetterkind also thought they were a bit high.

“We are into some near term resistance in live cattle at $128 basis Oct and $132 basis Dec and those price levels already price in a higher cash trade for this week,” he said Thursday morning. “So we could see a little pullback from those price levels, which is what we are seeing this morning. Wouldn’t expect to see too big of a break though and would look for Oct to find support at $126 and Dec support at $130 going into next week.”

Things are also looking up for product values.

“Product values are searching for a bottom at current levels,” said Gottschalk. He opined that Choice would challenge $198-$200 during the fourth quarter on the assumption that “no significant downturn in consumer demand” occurs.

Over last week, Choice product gained 95 cents to close Thursday at $193.34 and Select gained $1.09 with a close of $177.05.

Feeder cattle

“Feeder cattle continue to defy gravity with buyers scrambling for the limited supply of yearling offerings,” described Gottschalk. And indeed they were. Every surveyed auction market which had a quote on yearling feeders had them up. The medium and large 1 class (#1) steers saw more calf-only offerings than in previous weeks.

Iowa: In the Bloomfield Feeder Cattle Auction, there were 1,265 receipts with active trade and very good demand. No comparisons given the length of time since the last comparative sale. Majority of the offering was feeders over 600 pounds. A good number of #1 steers in the 700 pound range sold for between $166.42-173.62.

Kansas: The Pratt Livestock Feeder Cattle Auction sold 1,800 head last week. Heavyweight steers sold up $5-8 and similar heifers sold up $1-4. Animals under 600 pounds were not well tested. Mid-700 pound #1 steers sold for between $165.25-170 with preference going to thinfleshed steers. At the Winter Livestock Feeder Cattle Auction, 2,880 head sold which was up from the prior week and the same week in 2012. Trade was very active and demand was very good as people want to own yearling feeders with activity and demand on calves notably cooler.

Heavy yearling steers were up $4-6 with instances of up $8 and similar heifers were up $3-6. No quote on calves. Over 200 head of 761-pound #1 steers sold for $165.68.

Nebraska: The Bassett Livestock Auction saw 1,860 head sell, though there was a limited number of comparable steer offerings. Yearling heifers sold up $4-6 and almost the entire offering was over 600 pounds. Over 60 head of mid- 700s #1 steers sold for $168.

New Mexico: At the Clovis Livestock Auction, 1,720 head sold in active trade on good demand. Steer and heifer calves were called steady to up $4 with instances of up $10 for weaned calves. Yearlings were up $2-4. Slaughter cows were down $1-3 while bulls were $4. Only five calves in the mid-700 weight range #1 were sold, and they went for $136.10.

Oklahoma: In the El Reno sale, there were 5,234 receipts on moderate demand. Yearling feeder steers were up $2-4 and heifers were up $3-5. Calves were called uneven but steady overall with the exception of weaned calves, for which there was strong demand. Mid-700s #1 steers were numerous and sold anywhere from upper $150s to upper $160s.

Texas: The Amarillo Livestock Auction saw just over 1,000 receipts with calves of both sexes called firm to $4 higher. Yearlings were not quoted due to insufficient comparable sales in the prior sale. Only 13 #1 calves sold in the 700 pound range and they went for $142.03.

Washington: The Stockland Livestock Auction of Davenport saw a much larger sale than usual with 655 receipts last week. A higher undertone was noted with good demand and active trade. A couple dozen mid-700s #1 steers sold in the $140-141 range.

“Should begin to see a larger offering of fall calves come to the market in the coming weeks,” predicted Vetterkind. “The same can be said for the yearling steer/heifers, but with stronger futures markets and the higher cash fed cattle market the yearlings may hold better than the calves.”

Feeder futures were a bright spot among a cast of shining stars last week. Like live cattle futures, near-term feeder futures gained respectably over the week. Compared to their prior-Friday closes, the September contract gained $2.45 with a $159.55 close on Thursday, and October closed with $164.38, a weekly gain of $4.16.

“Feeders are into contract highs at $165 basis the Oct/ Nov contracts, and here too we could see a little pullback from that resistance,” said Vetterkind. “But any near term correction in the feeder futures is going to find good support at $161-$162, which were old resistance levels from the first of August.”

Matthew Diersen, Professor Department of Economics at South Dakota State University pointed out that the implied volatility in feeder cattle futures and options is low. “Very low.”

“The implied volatility is industry’s best guess at how much a futures price will fluctuate between now and when the contract expires,” he explained. “That volatility does not depend on how much cash prices have moved in the recent past. That volatility is the one that producers are worried about. They want to know what will happen to feeder cattle prices by January or March of 2014.

“Implied volatility for those months has been under 9 percent in recent weeks. Typical for feeder cattle in recent years has been a volatility level of 15 percent. A high level of volatility would exceed 20 percent and a low level would be under 10 percent. By that reasoning, the volatility is low. Typical live cattle volatility levels are higher than for feeder cattle and the implied volatility is low there too.”

He spoke at length about the opportunities this low volatility has for anyone seeking to defer risk with livestock insurance.

“The implied volatility drives the cost the industry charges to transfer risk. At low volatility levels, simple marketing strategies such as buying put options on feeder cattle look attractive. An atthe-money January feeder cattle option would cost about $3.50 per cwt. today with implied volatility at 9 percent.

The same option would cost about $5.75 per cwt. were implied volatility at 15 percent.

“The bottom line is that if these volatility levels hold, it will be very inexpensive to transfer cattle price risk using livestock insurance or using options (of any kind). The lower cost of coverage could show up in higher prices bid for calves this fall.” — Kerry Halladay, WLJ Editor

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