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.
Typically, the costs are at or close to contract highs for this time of yr throughout accessible months. Or it’s not ordinary to have the ability to lock within the presently accessible excessive costs. The tight provide will proceed till feed turns into extra plentiful and producers are capable of 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 latest value stage above $122 is excessive, but nonetheless trails the report stage value for the contract month of $242.93 reached again in 2014. The distinction is the value 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 worth ranges accessible could also be engaging, particularly when trying on the advertising plan for the 2023 calf crop.
Normally, such excessive costs could be coupled with comparatively excessive ranges of volatility within the futures and choices market. Volatility within the mid-teens is widespread and results in widespread at-the-money choices to value round $5 per cwt to buy. The present implied volatility within the stay cattle market is lower than 10 %, or very low by historic requirements. The impact is widespread choices might solely value $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 possible incorporates corn value danger into feeder cattle.
Producers have two incentives to take a look at the markets; costs that are excessive and volatility which is low. Futures would thus be engaging from a value stage standpoint as they supply a method to lock within the presently accessible value ranges. Put choices would even be engaging as a method to lock in an excellent ground value with out a very giant preliminary expense. Are producers doing so? The Dedication of Merchants report can normally be monitored to see if smaller place holders have been lively or not. Nevertheless, that indicator stays delayed due to technical issues.
Producers have been actively shopping for Livestock Danger Safety (LRP) on each fed and feeder cattle in latest months, setting a report with the legal responsibility offset underneath this system. Since July, producers have coated nearly 2 million head of feeder cattle utilizing LRP, following a report stage 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 overlaying nearly 600,000 head the complete yr earlier than.