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Reading the signals from the cattle futures market

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In my national publication, BEEFLINK, we examine the fundamentals of a market on a weekly basis. The drivers to pricing cattle in Alberta are live cattle futures (LC), feeder cattle futures (FC), currency, cost of gain, feed grains, basis, supply, demand and beef trade. These things all composted together derive into a price for the day.

In the next few articles, we will look at these drivers individually to see how they contribute to your market price. This is especially important now, as we experience excess volatility and uncertainty within the futures and cash cattle markets.

Live cattle futures (LC) allow you to buy or sell livestock at any point in the future. They are a reflection of anticipated supply and demand. Live cattle futures trade on the Chicago Mercantile Exchange (CME). Cattlemen refer to this exchange as “the board.” Contract months for live cattle are February, April, June, August, October and December. The end of these months is called the “contract close.”

Anyone can play on this board. And, they can drive a market based on related commodities. For example, if corn is projected to be in ample supply, then live cattle futures may appreciate based on a reduced cost of gain. This appreciation in the live cattle would be referred to as a “bull” market. On the other hand, if a beef export market should suddenly close, then live cattle futures may stumble, under the fears of excess supply, and consequently lower cash prices. This scenario would be referred to as a “bear” market.

When you “buy” a futures contract you agree to buy, from a seller, a commodity that he has likely not net produced. This is called a long position and you are anticipating the price will go up. When you “sell” a contract, you are selling something at the current price. This “shorting the board” or taking a short position, is taking advantage of a declining market.

The term “hedging” refers reducing your risk of price volatility by taking a futures position through a contract. During the time you hold a contract, you are responsible for the gains and losses in that contract on a daily basis. This is a “margin call.”

The cash price to the American producer is derived off the board, even if it is not a contract month. Cash prices are disciplined by the board price. For example, if October cattle on the CME are US$89 cwt at this moment, then cash prices paid for actual cattle will be within a close range of $89.00. At times, cattle “trade at a premium to the board,” which means that the bids on fed cattle will be more than the board price at that moment. Reasons for this could be a lack of supply for the kill floor or a drop in the board price unrelated to the cattle complex. Fed cattle bids could also be “at a discount to the board,” which refers to cattle trading in the marketplace at well below the board price.

RELATING IT TO THE FARM

How does this relate to cattle sold in Alberta? Futures prices are converted to Canadian dollars and the cost of doing business and delivery to a U. S. plant is deducted to determine a base price. This administrative cost of doing business and freight is called the “delivery basis.” In other words, the base price for Alberta fed cattle is as though they are delivered into the United States.

Futures prices are used an indicator of how investors expect the market to perform at a future time. This is used in fed and feeder cattle pricing and in domestic delivery contracts. There is no one to confirm for you if this will actually be the case – you must accept your own risk in these decisions.

For example, if April LC are trading at US$112/cwt then there will be considerable comfort in bidding on feeder cattle according to that potential sell price. Remember, the live cattle futures price and the cash price are often very near each other at the end of the contract close. If April LC is trading at $82/cwt then feeder cattle bids for cattle to finish in April will be reflective. As we know, April LC can settle anywhere based on the environment of that day. April LC and the cash market could settle at US$92 cwt at the contract close. That closing price determines the gains or losses within the contract.

The long and the short of it is that you must assess all the market factors before taking a position. And whether you do or not, the live cattle futures positions that others take on the CME, determine your market price for fed and feeder cattle in Alberta.

Brenda Schoepp is a market analyst and the owner and author of BEEFLINK, a national beef cattle market newsletter. A professional speaker and industry market and research consultant, she ranches near Rimbey, Alberta. Contact her at [email protected]

About the author

AF Columnist

Brenda Schoepp

Brenda Schoepp works as an international mentor and motivational speaker. She can be contacted through her website at www.brendaschoepp.com. All rights reserved.

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