Market Disruptions

The May Cattle on Feed report released last week showed a lower level on feed compared to a year earlier. Despite wide ranges of trade estimates for placements and marketings, once averaged together they were close to the actual numbers for April 2020. Marketings were 76 percent of the level from last April, while placements were 78 percent of last April. The lower marketings were COVID-driven. The disruptions have also lead to an increase in slaughter weights. The estimates of cattle on feed for more than 90 and 120 days increased sharply at a time of year they would usually begin a seasonal decline.

After a low level of placements during March, placements were again lower during April. There has not been a clear pattern in placement weights; most categories have just been lower for a couple of months. For some perspective, an examination of feeder sales showed the largest slowdown during March. Using the LMIC’s compilation, Sales of Feeder and Stocker Cattle, the total volume of such cattle sold direct and through auctions was down 12 percent from a year earlier in April and down 47 percent from a year earlier in March. A rough estimation suggests about 0.5 million head fewer than normal did not trade in March and may not have yet traded. Some of the discrepancies may be due to AMS reporting challenges. However, the main takeaway is that there are a variety of weights of feeders that need to move to feedlots.

One marketing channel that has been disrupted is the forward contract segment. Producers, generally speaking, use forward contracts to assure an outlet for cattle. In past conversations, feedlots have considered forward sales if they were concerned about slaughter capacity at a given time of year or for a given location. Contract volume slowed dramatically in March and April. The AMS tracks such volume in a Direct Slaughter Cattle report, LM_CT153. Typical forward volume, new signings, are 30,000 to 50,000 head a week across delivery months. That volume dropped below 9,000 head in early April and is starting to return to more normal levels. However, for specific months, June 2020 for example, the cumulative volume has not changed much since the COVID-related disruptions began. A trade-off when using a contract is relationship risk. Will the buyer fulfill the terms of the agreement? Will the seller give up a better opportunity?

Relationship risk is less of a concern when using futures contracts. There is either an unknown counter-party wanting to own cattle or a nameless speculator willing to risk capital in the market. Live cattle can be delivered to settle a futures contract. In late April (with the most-recent contract to expire) there were very few tenders for delivery. However, as the contract settled, tenders increased. In an AMS report on May 12, there were 40 contracts delivered and 13 still scheduled for mid-May delivery. The futures prices, at settlement, would thus reflect the cost of holding cattle until slaughter.

Source:  Matthew Diersen, Risk & Business Management Specialist, Ness School of Management & Economics, South Dakota State University