4 June 2010

4 minute read

North America

Strong Fed Cattle Basis Helps Keep Marketings Current

Since the highs in the fed cattle market in April and May at just over $100/cwt (live weight basis for Nebraska), cash fed cattle prices have lost almost $7/cwt. Nearby futures prices (June CME futures contract) have declined more $8/cwt from their highs last month. Thus, the basis, or difference between cash and futures prices, has widened. Actually, during the last several weeks, the futures market had been declining more rapidly than the cash market, leading to fed cattle basis being much stronger than is typical for this time of the year. The Nebraska slaughter steer basis has averaged $1.66/cwt during May for the previous three years (typically it is above $2/cwt at the beginning of May and less than $1 by the end of May). During May this year, the basis averaged $3.98/cwt, more than twice the previous 3- year average. Nebraska fed steer basis reach a high of $4.72/cwt in the second week of May. Basis last week, at $3.02/cwt, is still more than $2/cwt higher than the 3-year average observed for the last week of May.

The particularly strong basis this past month has had a positive impact on the fed cattle market. The strong basis has encouraged aggressive marketings, particularly for cattle feeders that hedged cattle. For May marketings that were hedged earlier in the year, cattle feeders had an opportunity to sell those May cattle at cash prices that were higher than expected relative to the futures market, thus resulting in a higher than expected net sales price. Thus, marketings as a percentage of the cattle on feed inventory have been over 17% this spring, and the number of cattle on feed for more than 120 days dropped 8.8% on May 1 relative to a year ago. Because cattle were marketed so timely, the lower carcass weights observed since winter have generally remained. Currently, steer weights are thirteen pounds lighter than last year, and have been as much as 25 pounds lighter than 2009. While dressed weights reached their seasonal low a couple weeks ago and have begun to increase modestly, lighter weights continue to be supportive to fed cattle prices.

Two factors support fed cattle basis remaining stronger than average through the summer and fall months. First, while the gap between carcass weights this year versus last year is declining, they are likely to remain below 2009 levels for at least the next couple of months. Second, the rally in the fed cattle futures market during March, April, and May offered feeders the opportunity to hedge summer and fall marketings at a profit. To the extent that feeders hedged the sales price for the cattle they were placing earlier this spring and more hedging took place than normal for this time period, they will likely keep marketings current, incentivized by futures market gains to be made when cash cattle are marketed.

The Markets

The fed cattle market continued its retreat last week, with live and dressed prices down 4% compared to the previous week. Across the 5-Area market, live prices averaged $93.63/cwt, $3.40/cwt lower than the previous week, and dressed prices averaged $149/cwt, $5.69/cwt lower than the previous week. The sharply lower prices observed last week were due to the influence of outside markets, general concerns about the world economic and financial condition, and domestic beef demand. Wholesale beef prices were lower last week, with Choice boxed beef prices averaging $165.76/cwt, $2.42/cwt lower than the previous week. The Choice-Select spread did increase $1.49/cwt last week. Lower fed cattle prices contributed to lower feeder cattle prices as well. Yearling steer prices were down $1.50/cwt in Nebraska last week and were more than $4/cwt lower in Oklahoma and Montana markets. Steer calf prices fell about $8/cwt in Montana and Nebraska last week and $3.75/cwt in Oklahoma. An increase in corn prices through Thursday last week further depressed feeder cattle prices. However, sharply lower corn prices on Friday erased gains for the week in the corn market. Distillers grain prices were about $1/ton lower last week as well.