The Cattle Range Home Page
September 11, 2017
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Changing The Marketing Plans - The Contra Effect

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Changing The Marketing Plans - The Contra Effect
Ag Center Cattle Report

It should be no surprise to most traders that futures prices directly impact the marketing plans of those with cattle on feed. Two important aspects of futures prices directly influence how many cattle are sold each week and at what price. These influences have a material bearing on both the short term prices and the longer term prices. In each case the futures price level tends to create a contra impact on the cash markets.
 
The first impact is simply a result of the price level of futures. If futures prices in the out months are higher then people tend to delay marketing plans to capture the anticipated premiums futures are forecasting. Alternatively, if futures are forecasting lower prices cattle owners tend to push marketing plans forward to capture higher cash prices now. These actions and changes in marketing plans are independent of risk protections and influence the weekly decisions by all owners on when to sell their cattle. The feeding industry has benefited all year from the heavy discounts in futures prices that caused owners to market cattle early and the result created less tonnage and higher prices than futures predicted.
 
The second impact is the basis level. This primarly influences the hedged sellers of cattle. A poor basis is one when cattle owners sell cash cattle at a discount to the spot futures month. The live cattle contract trades every other month so if the basis is poor, sellers tend to hold cattle until closer to the contract expiration in order to hope for convergence of cash to futures. Of recent, hedged feeders have been spoiled into the belief that cash to futures basis would always be positive and some forecast breakevens based on that premise.
 
The current futures market, building premiums into futures prices, will change many marketing plans. Cattle in the feedlot are losing money and people are seeking a pathway for improving their positions. Cattle sold at $105 this past week will cause hedged operations to cover futures prices at $107+. This will encourage more hedged cattle owners to delay marketing cattle into October when cash and futures are expected to converge. Likewise, unhedged cattle owners will look at the October board and decide to delay marketing plans to capture a higher price. And even those anticipating sales in October will start changing plans to hold on to the cattle until December and capture another $5 for their cattle.
 
These changes in marketing plans and selling prices also impact packers. You won't find many weak sellers when the futures contracts are selling premium to cash. It is easy to turn down a $103 bid when futures for the next month are $107. The weak sellers come along when packers bid $103 and October futures prices are $98.
 
Reluctant sellers hold cattle and holding cattle past normal marketing intentions translates into heavier marketing weights. Heavier marketing weights means more beef tonnage. Combining more tonnage with more numbers and a limited slaughter capacity and you create an unhealthy environment for beef prices. These conditions also benefit packer leverage in the weekly face off with cattle owners.  There is some theshold when holding cattle ceases to benefit the cattle owner. Holding cattle to a point when heavy carcass penalties exceed improved pricing is one point. Moreover, the last 100# of gain is often misunderstood by many cattle owners. The last 100 lbs. is the least efficient weight placed on the animals and often exceeds the selling price.
 
Many commentators and analysts constantly warn cattle feeders to stay current and don't let cattle build up. They speak to the good of the industry and the importance of increasing tonnage on the market from over fed cattle. Unfortunately, those warnings will fall on deaf ears and each operation will be motivated by self interest and the contra effect will prove valid one more time.

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