Constant beef demand, present and anticipated tighter provides of fed cattle have pushed the currently-listed futures costs to constant life-of-contract excessive ranges. Wanting again at earlier years, most stay cattle futures costs peaked in mid- to late-2014 with the February 2015 contract topping out at $171.83. Most of this previous week the April 2024 contract has been above $172. Thus, if it looks like costs are excessive, it’s as a result of they’re excessive.
Usually, the costs are at or close to contract highs for this time of yr throughout obtainable months. Or it’s not ordinary to have the ability to lock within the presently obtainable excessive costs. The tight provide will proceed till feed turns into extra plentiful and producers are in a position to maintain again substitute heifers.
The excessive anticipated worth of stay cattle carries over, to extent, to the feeder cattle futures. The November 2023 contract, for instance, has been trending greater because it was listed final November. The current worth degree above $122 is excessive, but nonetheless trails the document degree worth for the contract month of $242.93 reached again in 2014. The distinction is the worth of feed, as corn and hay costs simply push the ending margin up by far more than the $160 per head distinction within the present and record-high futures costs. Regardless, the value ranges obtainable could also be engaging, particularly when wanting on the advertising plan for the 2023 calf crop.
Often, such excessive costs could be coupled with comparatively excessive ranges of volatility within the futures and choices market. Volatility within the mid-teens is frequent and results in frequent at-the-money choices to price round $5 per cwt to buy. The present implied volatility within the stay cattle market is lower than 10 p.c, or very low by historic requirements. The impact is frequent choices might solely price $3-4 per cwt to buy. The volatility is just not fairly as low within the feeder cattle market, particularly for deferred contract months, because the commerce probably incorporates corn worth threat into feeder cattle.
Producers have two incentives to have a look at the markets; costs that are excessive and volatility which is low. Futures would thus be engaging from a worth degree standpoint as they supply a solution to lock within the presently obtainable worth ranges. Put choices would even be engaging as a solution to lock in a very good ground worth with out an excessively giant preliminary expense. Are producers doing so? The Dedication of Merchants report can often be monitored to see if smaller place holders have been lively or not. Nonetheless, that indicator stays delayed due to technical issues.
Producers have been actively shopping for Livestock Threat Safety (LRP) on each fed and feeder cattle in current months, setting a document with the legal responsibility offset below this system. Since July, producers have coated virtually 2 million head of feeder cattle utilizing LRP, following a document degree of two.1 million head the complete yr earlier than. Producers have additionally coated over 500,000 head of fed cattle with LRP since July, after masking virtually 600,000 head the complete yr earlier than.
