The Cattle Market Explained
Recent market volatility has producers from all over the country wondering about the future of the cattle industry and how it affects their business. For some ranchers, not fully understanding how the market works is an unwelcome added stress to this uncertainty.
To break it down, the cattle market is simply based on supply and demand and there are a few things that play into this. One of those things is that the majority of cattle are born in the spring, which means they are offered in the fall so a lot more calves for sale in the fall versus the springtime. Secondly, there is limited space on the kill floor to hang carcasses and ultimately serve people. The industry expects to have meat year-round for restaurants, consumers, and grocery stores, yet a majority of beef supply comes within a 6-week period.
Keep in mind when we look at the supply and demand of feeder calves specifically, we can see there is an international shipping season which occurs in late October to early November. The demand is lower but the supply is high during this time, resulting in lower prices for cattle.
Some things producers can do to make their calves worth more is to find the holes in their own herd to improve the quality of their calves and then find a niche market where the supply isn’t nearly as high. A downside of this, though, is there may be lower demand until people realize that this niche is going to be a hole in the market. Another thing to think about is that a majority of cattle come in October and November so the months of April, May, and June are really high supply-wise on the packers and the feeders emptying out.
The cattle market is very cyclical. When looking at it from its inception up until now, it follows a very common pattern, and it actually is still following that very pattern now. But, what it tells us is that we must find a niche market for our calves, or we need to find a niche place to sell our bulls and our cull cows. We have to find the area where demand is high and supply is low.
A lot of people sell their cull cows as soon as they ship their calves. They preg check and the open ones go to town. Almost everyone else is doing the same thing so there is a lot of supply and low demand with this strategy. Demand increases again right around Christmas, or as we get through the spring where there is less supply. The same thing happens with bulls. A lot of people pull their bulls and sell the old ones at the exact same time. Again it’s a supply and demand issue.
Yet another factor to take into consideration is that every single bid a seller receives on their calves is based on a futures board even if the bidder is not going to hedge them. The futures board months they are looking at are April, June, and August.
What’s really important in the April market is weight and days-on-feed. As we get into November and December, Cattle cannot hit the April board because they simply won’t have enough days-on-feed. In order to hit the April board, the rule of thumb is to shoot for before October 15th. Historically, the April board is the highest month, and it decreases into June and then August.
What we know about April is that it is really challenging to get a fall calf that harvests in April. This is the goal, but in reality, most of the cattle selling in the fall will be harvested that June or July market, based on the June board.
Oftentimes when heifers are sold they are 50-100lbs lighter in some places because the replacements are kept off, and that means some might bid on steers on the April board while the heifers are on the June board.
When marketing cattle, it’s pertinent to pay attention to the board, and when the on-feed report comes out. Lots of information plays into calf value, but some of it just has to do with mood. For example, If it has been a really tough summer with lots of storms, or the market wasn’t that great, sometimes it’s tough to sell cattle because feeders aren’t in the mood to buy them. It's important to remember there’s a human part of markets as well.
The best way for producers to get the most out of their cattle is to really understand the futures market, know how to study it, know how to figure out what calves are worth based on the breakeven on the futures market, watch the on-feed report, and find a niche market for your calves, cull cows and bulls. Finally, work with someone who can help you understand these numbers, and can give you suggestions on when you can sell your animals for a higher premium with added value.
If you want to learn more about cattle markets, futures, and hedging, be sure to sign up for Cattleman U.