By Justin Gleghorn, Brock Thompson Trading
The feeder cattle index has been in a bear trend since the middle of August with the largest declines occurring towards the end of month in both August and September. With the market feeling somewhat oversold, it has rallied slightly over the last week. This has occurred in the face of a $0.40/bu. rally in December corn.
The fact that feeders held in reasonably well during the corn rally gives credence to the fact that the market may have been oversold. Be mindful that, seasonally, the feeder index tends to decline going through the fall and into early winter. However, a counter-seasonal trend may occur in the feeder complex, as technically some other markets appear to setting up for counter-seasonal moves as well.
Progression of the wheat crop over the next 30-45 days is critical. Current wheat conditions have plantings at 64%; slightly behind the 5-year average of 69%, but emergence is 39% and the 5-year average is 40%. As it stands now, optimistic opinions are prevalent concerning the availability of ample wheat pasture for the early winter and into next spring. It is doubtful that prices, either per head or per unit of gain, will be as high as they were last year.
Currently cattle feeders are not feeling any relief in the cash market as most trade last week as between $81.50 and $82.00/cwt. Although the decline in corn prices has helped lower production costs, the fat market has been steadily declining through the last days of summer. Although our beef population is at its lowest level in recent years, we are producing ample supplies of beef.
For 2009 heifer placements are high (approximately 37% of placement totals), and these are the highest levels since 1997. This trend would indicate that our cow population is not expanding and further shortages in the number of cattle would be expected. With that being said, fat prices were $2.00/cwt. higher in the Texas Panhandle on Friday, while trade in northern regions was not as strong; there may be some indication that the live cattle market may have steadied for the near term.
Questions facing feedyards today include not only the availability of feeder cattle, and their respective price, but the size of the incoming cattle. In some instances old rules of thumb may have to reevaluated. Yards may have to change the demographics within their population to appeal to customers or alter their business model to find news areas of opportunity and/or profitability. That is operations may have to be open to placing a different size of animal in the future.
As margins tighten, the need to be somewhat flexible is important. However, this flexibility may create opportunities for both feedyards and stocker operators. Labor is becoming less available and more expensive, therefore the offering of lower risk cattle to yards could generate value for the stocker and calf producer.
The critical subject facing us is how demand of domestic beef will play out in the face of a weak economy and ever-tightening household budgets. However, there are ample opportunities going forward. It has yet to be proven whether or not last week's price activity is an indication of things to come, but as cattle feeders move closer to seeing positive returns their desire to become more aggressive with placements will increase and thus may create an interesting feeder market next spring; but more importantly next summer and fall.
--Justin Gleghorn is Risk Management Consultant with Brock Thompson Trading in Amarillo, Texas. You can reach him via e-mail at email@example.com
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