Cattle Market Update: A Strong Rebound or an Unstable Peak?

What Happened

August live cattle futures achieved their peak on June 9, reaching $220.05 per hundredweight (cwt). Following this high, prices dipped over $12 as market speculations anticipated a decline in demand after the Fourth of July holiday. Surprisingly, August futures have made a substantial rebound, soaring just below $221 per cwt at the time of this report. This sharp increase is attributed to stronger-than-expected demand around the holiday, a weakening dollar, and futures short covering. Cash prices are still exceeding futures, contributing to the upward trend. However, given high prices and seasonal trends, there is a possibility that the market is approaching its peak. This recent price recovery presents a critical opportunity for cattle producers to hedge against potential declines in the future.

Why This Is Important

Historically, demand typically decreases in midsummer as the grilling season concludes. Unless experiencing extreme heat, weight gain for cattle remains strong. Although the long-term trend for cattle prices continues upward, concerns regarding strained consumer budgets suggest potential vulnerabilities for a price downturn. With prolonged high feeder cattle prices, breakeven costs are elevated, increasing risk for those finishing cattle. As such, complacency regarding high live cattle futures can prove detrimental.

What Can You Do?

One prudent strategy is to consider purchasing a put option, which establishes a price floor for futures while allowing for potential upside. Although higher futures prices make options seem costly, they offer not just financial protection but also peace of mind. Alternatively, if you’re comfortable moderating potential upward price gains, selling an out-of-the-money call option to collect premium can offset the costs of the put option. This strategy, known as “fencing,” effectively sets a price range for your cattle.

If you engage in a fencing strategy, anticipate margin calls. When a call option is sold, the seller collects a premium but is also at risk if prices rally and the option increases in value. This may require maintaining a certain maintenance margin in your account. If a call position is exercised, the seller’s account incurs a short futures position at the sold strike price. Discussing this strategy with an advisor is advisable to ensure you are comfortable with the risks involved.

Find What Works for You

Collaborating with an experienced professional helps in determining the most suitable strategies for your operation. Effective communication is essential. Asking critical questions and understanding the potential consequences and rewards of any strategy enhances decision-making, steering clear of emotionally driven responses to volatile market conditions.

Editor’s Note: For inquiries regarding this perspective, please reach out to Bryan Doherty at Total Farm Marketing: (800) 334-9779.

Disclaimer: The information presented herein is deemed reliable yet cannot be guaranteed. Individuals acting on this data assume full responsibility for their actions. Commodity trading involves significant risks of loss and may not be suitable for all. Carefully consider whether such trading aligns with your financial condition. Historical price movements or market conditions are not indicative of future occurrences. The data does not imply that any future trading decisions will be endorsed or attributed to Total Farm Marketing.

About the Author: Bryan Doherty has over 30 years of experience at Total Farm Marketing, providing valuable insights across the Grain Belt. As a senior market advisor and vice president of brokerage solutions, he is committed to supporting clients in achieving long-term success by offering tailored marketing strategies.