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Will History Repeat Itself in the Cattle Market?

What’s Happened…

Front month futures in live cattle bottomed in 2009 and proceeded to rally for the next five years, peaking in 2014. Cattle futures then began to decline, finding a bottom in April of 2020. Since then, cattle prices have remained in an uptrend for five years, bearing a similar price pattern from 2009 through 2014.  

Is the cattle market reaching a long–term peak? Tight inventory numbers and continued strong demand have provided support. History, however, would suggest that the herd could be in a rebuilding phase which, in part, has led to tighter supplies of market–ready animals in recent years. Some might argue that is not the case, yet it does make sense that smaller slaughter numbers may occur when heifers are being held out of the slaughter mix. 

Why this is Important…

As with any long–term uptrending market, it is easy to become complacent from a marketing perspective. Now is not the time for producers to take their eyes off the ball. The higher in value a market becomes, the more likely there will be sharp price corrections or the beginning of a long–term downtrend. The argument that demand can build at higher prices doesn’t hold much weight historically, whether it be cattle or any other commodity where supply and demand numbers respond to market forces. 

The old saying is that high prices cure high prices, and low prices cure low prices. Therefore, exercising risk management strategies, whether you have cattle in the yard or paying for feeder cattle, makes perfect sense in a time of high prices. This also includes protecting the cost of feed which, by historical standards, is low. Bottom line, now is the time to protect prices for livestock and future feed purchases. 

What can you do about it?

Develop a comprehensive strategy that defends the price of cattle, whether feeder or fats, while also protecting against higher grain prices. Weather developments in the weeks and months ahead are critical for crop production. Counting on record yields year in and year out and not defending against higher values could be devastating to your bottom line. Less–than–ideal crop production could add dollars per bushel to corn and soybeans in just weeks.  Assuming good weather and high crop production may be the right thing to do in most years, yet is not a strategy to prepare for the unexpected. Consider call options against future corn and soymeal purchases. Consider put options to establish a price floor for your livestock. Using puts leaves the top side open for price advances. Write out your strategies, review them for necessary adjustments, and then execute. 

Find out what works for you…

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation and less emotionally–charged responses to market moves, which are always dynamic. 

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation. 

Author

Bryan Doherty