Market Volatility Continues in the Cattle Complex

April 6, 2011 01:50 AM
 

wlky04012011

Weekly USDA feeder cattle prices for TX and OK were used to calculate projected breakevens on cattle bought last week, week ending April 1, 2011. Breakevens were calculated for each weight group within sex (steer and heifer). Ration price, $/ton dmb, was estimated at $340. Other variables including interest, yardage and % feed financed were estimated to be 6%, $0.05/d and 100%; respectively. As it is known that actual input estimates will vary greatly by region and by yard within region, our goal was to illustrate pricing differentials between weight classes and sexes of cattle. 
 
Market volatility continues in the cattle complex. Last week live cattle trade smashed record prices, with average negotiated cash prices at $121.00/cwt in Texas and Kansas and above $123.00/cwt in Nebraska. As such, the feeder cattle market was impressive, with most classes trading $5.00-8.00/cwt higher by the end of the week.  
 
Strong boxed beef prices and exports continue to provide support for the live cattle trade and continuing supply doubts support the yearling, feeder and calf markets. However, some issues are worth noting. Specifically the live cattle futures board did not respond to the cash trade with much vigor, since March 30th, the front month contract was only able to rally approximately $2.00/cwt to a closing high of $122.175/cwt. Given our current price levels, it could be argued that buying interest in the cattle complex may be waning. More worrisome than the lethargy in the cattle complex is the strong bullishness in the grains. 
Following USDA’s acreage intention and grain stocks report on March 31st, front month corn has rallied $1.03/bu to $7.667/bu (as of close 4-5-11). This has undoubtedly increased cost of gain projections for the rest of the year, as it appears that despite the increase in planted corn acreage (up approximately 4 million acres from a year ago) there is little chance to offset the declining corn stocks; which were 15% below levels reported last March. The worst case scenario for the cattle feeder and producer is high costs for replacement cattle, a steady live cattle market and increasing corn costs.
All of these factors are summarized in the projected cattle profit and loss values calculated in the table above. The issue has been exhaustingly discussed throughout these summaries, live cattle prices are not keeping pace with input costs: feeder cattle and corn. Until this relationship changes, the opportunities to lock in profits become less and less; but the volatility in the market remains present. 

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