The Marketing Plans - The Contra Effect
Ag Center Cattle
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.
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.
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.