Cattle futures rocketed higher Wednesday, led by Feeder Cattle, apparently buoyed by technical buying and the simple fact they were so oversold.
Live Cattle futures closed an average of $1.43 higher ($1.10 higher at the back to $2.12 higher).
Although still a touch lower week to week, Feeder Cattle futures closed an average of $4.22 higher.
Cash fed cattle trade remained undeveloped. There were only 315 head (three lots) offered in the weekly Fed Cattle Exchange auction, and no sales.
Corn futures closed 2¢ to 4¢ lower through Jul ’20 and then fractionally mixed.
Soybean futures closed 6¢ to 9¢ lower through Sep ’20 and then mostly 2¢ to 5¢ lower.
Wholesale beef values were steady to weak on light to moderate demand and moderate offerings, according to the Agricultural Marketing Service.
Choice boxed beef cutout value was 6¢ higher Wednesday afternoon at $219.70/cwt. Select was 39¢ lower at $198.56.
Major U.S. financial indices closed mixed and little changed on Wednesday, following the previous session’s decline.
The Dow Jones Industrial Average closed 11 points lower. The S&P 500 closed 3 points lower. The NASDAQ was up 25 points.
Over time and in dichotomous terms, depending on one’s perspective, Feeder Cattle futures provide necessary price discovery and a valuable tool to manage price risk. Or, they’re too thinly traded and cash-settled against an index too divorced from daily reality to be of much use to producers.
Researchers at Kansas State University (KSU) tackle the facts in Overview of the CME Group Feeder Cattle Futures Contract by Ted Schroeder, KSU agricultural economist and Justin Bina, a Student Fellow of KSU’s Center for Risk Management Education and Research.
There are no definitive answers.
“Our research provides a better understanding of the issues surrounding the Feeder Cattle futures contract and the contract’s performance over time. However, more extensive research and, especially, discussion with industry users must be conducted to definitively gauge performance of the contract,” say Schroeder and Bina. “Moving forward, increased communication between contract users and CME Group about industry needs and feasibility issues is essential to guarantee successful future use of the contract for price discovery and price risk management purposes.”
The study provides invaluable insight for those conversations. Among the conclusions:
“Cash and nearby futures prices remain highly correlated across time and geographic locations. In addition, basis variation generally decreased in 2014–2018, an era of historically high feeder cattle prices and increased volatility. This implies that the feeder futures contract is a valid price discovery tool and generally tracks cash market conditions across numerous locations.”
“…Feeder Cattle futures trade volume—both front month and deferred contracts—has increased drastically in the last 15 years, but still pales in comparison to similar agricultural products. Discussions with industry users is necessary to determine if the contract should be considered ‘illiquid’ or ‘thinly traded,’ but it appears to be relative to other derivative products in the agricultural complex.”
“Recent volatility in the feeder cattle futures contract is not out of line with certain historical periods, though it has been more sustained in the last five years. Comparison to the other cattle crush inputs shows that feeder cattle volatility is similar across time to that of live cattle and substantially less than corn. However, Feeder Cattle volatility has increased disproportionately since around 2015. Speculative trade activity was assessed to determine its role in increased volatility in Feeder Cattle futures; however, we conclude that volatility does not increase due to an influx of speculative activity, but rather that speculators enter a market as a result of the risk (opportunity) already inherent in that market due to other economic factors.”