We’ve gotten a little spoiled over the past two years by the impressive increases in demand for beef, which has pushed cattle prices to new highs and to a new concept of a “normal” price.
However, wholesale beef market watchers suggest that the impressive spurt in demand may be behind us.
If you are going to switch to the Atkins diet, you already have and if you’re a company thinking about adding a new Atkins-friendly product, it’s probably already on the shelf, in production or been scrapped.
Faltering? But does this mean that demand is faltering?
While there may have been a slight bubble from Atkins, it would be unlikely that we’ll see any noticeable decrease in demand, but when you are used to life in the fast lane, it might seem that way.
Unless there is scientific evidence that surfaces against low-carbohydrate diets or animal disease-related scares occur, demand should be stable.
That still leaves the practical issue: Where will fall prices go?
Driving issues. Several issues will drive this.
First is the rudimentary issue of the number and weight of cattle coming to market during the next four months.
The big issue here is that summer slaughter levels were extremely small compared to historical levels while slaughter weights have been increasing.
Many are worried that there is a wall of heavy cattle waiting to come to market that could cause prices to stagnate in the lower $80s, and some evidence of this appears in the August Cattle on Feed report and in weekly slaughter weight reports.
Those holding this view helped push October and December futures prices down by $5 and $6 during the last weeks of August into their current position in the low and mid-$80s.
What to monitor. Weekly slaughter weights of steers will be the key statistic to monitor over the next couple of weeks to determine how much more drag this might put on fall prices.
Balancing against this is the potential for the resumption of trade with Japan, which would be an obvious boost to markets.
The psychological boost would likely appear immediately after such an announcement, and might provide some good pricing opportunities.
Bureaucracy. The boost in cash prices might be delayed due to usual bureaucratic issues that separate proclamation and progress.
Furthermore, such an announcement might be shortly followed by an announcement that reopens the Canadian border to live cattle movement, which would also temper any cash market price boost.
One possible (though highly speculative) possibility that fits the political realities of our world is for a Japan trade announcement to precede the November elections and a Canadian border reopening announcement after election day.
The softening of fed cattle futures prices hasn’t fully transferred to the feeder cattle markets, however; feeder cattle prices have been strong all summer long.
This is partly due to declining feed prices.
However, many of the cattle marketed this fall will need to fetch prices in the mid- to upper $90s in order to deliver a profit to the feed lot owner.
If such prices don’t materialize, and “red ink” begins to flow, feeder cattle prices may decline from current levels.
Those who haven’t marketed fall calves may wish to keep this in mind as they establish the timing of sales.
Risk management. Also, starting Oct. 1, feedlot operators, back grounders, and cow-calf operators in Ohio and 18 other states will have an additional price risk management tool available: livestock revenue insurance.
The principle is simple: You insure against downward movement in cattle prices that might occur after you have committed to growing them.
So, if you bought 400-pound calves in October because the spring futures price for 800-pound feeders looked profitable, you get an indemnity payment if spring price drops below a certain threshold at the time you sell the cattle.
Of course, you pay the insurance premium up front, and the higher the threshold price you insure, the higher the premium.
Policies will be sold by private insurance companies and are subsidized by USDA.
For those familiar with futures and options lingo, this is essentially a put option.
Unlike standard put option, however, it covers as many or as few cattle as you want and can be customized to work for heifers and lighter weight cattle not traditionally covered by futures and options contracts offered by the Mercantile Exchange.
As more details about the contracts are posted by USDA, I will work through several examples of how the coverage would work and make these available to interested readers.
(The author is an Ohio State University Extension livestock economist.)
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