Varilek’s Cattle Call: Feeder calf futures rebound
March 8, 2019
The last week of February was a great week for the cash cattle market. The northern showlist of fed cattle had been holding out for higher prices. Cash trade at 128 live finally cleaned up the cattle being carried over from previous weeks. The showlist needed to become more current if we wanted to have the chance for a lengthened spring rally.
Producers could be on the verge of getting our basis and leverage back. Weather is holding the 2018 calf crop back from being marketed as feds. Feeder cattle are coming to the sale barns lighter, and gains in the feed yard are below expectations. Steer carcass weights are 9 pounds below a year ago. Furthermore, packer margins are in the green and grilling season is in front of us.
I do not think it is a coincidence that the higher cash market occurs when we have an increased amount of negotiated cash cattle. Cash trade in the South is becoming scarce. On any given week, formula trades could account for over 95 percent of the live cattle trade in Texas. It is not unusual for my customer base to negotiate more cash cattle in a week than the entire state of Texas. This means the packer already has 95 percent of their cattle spoken for. Those formulas are based on the remaining 5 percent. As the packer, you know the bulk of the cattle are going to be yours. There is no point in running up the bid on the remaining 5 percent because it only makes the 95 percent more expensive.
We have achieved a milestone in the live cattle futures contract. Open interest on Thursday reached an all-time high of 432,601. This provides liquidity for traders when using the futures market. When the open interest is at lower levels, we see more limit moves up and down with a less stable market. In my opinion, that record happening on a nice steady uptrend is great sign of strength.
The feeder calf futures have finally enjoyed a rebound worth noting. Sale barns continue selling feeders at a premium to breakeven price (which is not uncommon.) Sales are maintaining strength despite poor yard conditions and feedlots near capacity. Decreased corn price is also adding to that trend.
Seasonal highs in cash and futures can happen in the month of March. We will have an ample supply of cattle this summer so using this rally for some protection has certainly been the theme. Take advantage of the higher cash market as long as you can.
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The risk of loss when trading futures and options is substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results.