Varilek’s Cattle Call: Cattle numbers down 2-3 percent

Cattle futures had a pretty good week with many months trading contract highs. Cash cattle trade was $3-4 higher with $140 live trading in the north and south. The February board traded most of the week above $140 and will enter the delivery process next week. In the past, the south has been delivering cattle on the futures contract to capture the higher price and solidify a better basis for other cattle sold. That will be a risk next week with the premium built into the February board.

Early in the week was the USDA cattle in inventory report. It verified what many have been talking about over the years is accurate. The cow herd is on a swift decrease from the previous supply rally in 2015. Most categories aligned with a 97-98 percent of year ago levels.

Two reasons are causing the decreases in my opinion. One reason is the drier conditions have been forcing herd liquidation and limiting the ability to keep replacement heifers. Second is the lack of profitability in the beef production sector over the last several years. Input costs continue to rise every time we turn our head, so it was long overdue for the cattle prices to follow suit.

With the smaller cow herd, I feel optimistic about good prices for the next few years. However, we can look at all the supply we want, but if the packer still holds the ability to have large margins, the rally could have a cap on it. With roughly 85 percent of the fed cattle held in the packer’s pocket with formulas, chain speed will just slow down because the risk of rallying to buy the remaining 15 percent will not be worth it. In the record 2014 rally, the industry had more negotiators to deliver a higher price.

Even with hiccups in the road, I hope to find solutions for the traditional family operation and will continue to be involved with the current industry issues. Get those grills cleaned up because spring is coming, but of course most of us northerners keep them running year-round anyway. Have a good week.

Scott Varilek, Kooima Kooima Varilek Trading

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.