Hay Prices Ease in the Northwest But Remain High Overall
Hay makes up a large part of the cost to produce feeder calves. Without a doubt it is the largest variable cost cow-calf producers face. Not surprisingly, rainfall and drought play a large role in these costs depending on where you are located. For example, alfalfa grass mix hay in Montana is at $150 per ton according to USDA, down about $80 from year-prior levels. But in drought affected areas like Texas, similar hay prices at $310 per ton. This may make you want to buy hay from the Northwest but unfortunately it costs a lot to transport such a bulky feed, so few producers or businessmen have successfully deployed this strategy.
Cash Prices Inch Out of Sideways Pattern
Cash prices for calves and feeders are inching their way out of a sideways-to-lower price trend as we get closer and closer to the end of August. One could also argue that the “lower” part of that description is an overstatement. On July 31, the CME feeder cattle index closed at $244.69 per hundredweight. While futures have seen some big swings, the index – our best indication of cash prices – stayed relatively steady making a high of $245.84 per hundredweight on August 3 and a low of $244.04 on August 17.
August is historically a light demand month, where in a normal year with normal supplies, prices can move a few dollars lower before rallying into the fall. This year we traded August cash calves and feeders in a tight band of $1.80 per hundredweight, speaking to the continued tightness in supply.
A similar story is shared in the live cattle cash market where prices have remained above futures since April. Again, in a normal year with normal supplies, positive basis usually fades by July or earlier. This year, positive basis was reinforced in July and has persisted through August. The live cattle cash market can be clunky to wrap your arms around. Prices are split regionally into North and South, with Northern cattle and grades typically commanding a premium over Southern cattle and grades. This year, the North has traded cattle as high as $190 per hundredweight live and the south as high as $186 — pricing levels that no front-month live cattle futures contract has come near. Meanwhile, the 5-area weighted average smoothed out these differences with the high for August at $185.27 per hundredweight and the low at $184.46. Again, speaking to supply tightness, the market didn’t spend much time at the lows and are already climbing back towards $190/$180 live, North/South.
Demand has also played a pivotal role for current cash prices as consumers continue to buy beef in the grocery store. The price stability of the beef cutout offers a good measure of demand. While the packing community has seen margins go negative while cattle prices continue to stay high, the cut-out has offered a ray of hope. After the choice grade went above $300 per hundredweight in early April, prices have yet to break below that price point and are currently headed higher as packers prepare to stock shelves for Labor Day weekend.
Futures Trading Sideways to Lower
Paralleling the cash market, futures prices for feeder cattle have been trading sideways-to-lower through the month of August, a continuation from the month of July. While cash has traded in a tight band, feeder cattle futures wandered wider with a high of $249.525 per hundredweight and a low of $245.575 for a range of $3.950. Volume has slowed. For all the excitement in the live cattle cash market, the live cattle futures market has brought just the opposite. During the month of August, live cattle futures have traded as high as $180.900 per hundredweight and as low as $178.525 for a range of $2.375. Volumes have also been sluggish. As we enter September, look for feeder cattle futures to take their cue from cash receipts as we start the fall run. If a normal number of buyers enter the cash market to bid on tight supplies, we could see feeder cattle futures run higher, sparking higher movement in further out live cattle contracts. For front-month live cattle futures, continued strength in cut-out prices and consumer demand will provide support as we work through feedyard inventory in the last few months of the year.
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