May 4, 2009

The cattle that packer buyers kill in early May are expected to be heavily weighted toward pre-booked animals they have either under contract or on formula-pricing agreements.

Now that the Chicago Mercantile Exchange April futures contract has expired very near to last week's cash price, the spot month shifts to June, which is about five cents a pound below April's expiration of 87.55 cents. This should be enough of a difference that it will encourage packer buyers to lean on their contracted and formula cattle, the analysts said.

The basis between the cash market and the June contract may offer contracted, hedged and formula-based cattle sellers, as well as the packers, an opportunity to use the futures market to their advantage. Unhedged, non-contracted feeders, however, could take a price hit in coming weeks, they said.

Tyler Keeling, market analyst and broker at Amarillo Brokerage Co., said cash cattle prices could be pressured by the wide basis. Part of this pressure is psychological since June's expiration is two months away, but the effect still is there since the futures market is telling traders that prices will be lower in coming weeks.

But psychological or not, the lower cash cattle prices will help packer buyers whose job it is to reduce input costs for their companies, the analysts said. Not only might they be able to buy open-market cattle for less, they'll be able to price formula cattle lower because formulas often are based off the previous week's cash market, they said.

The contracted cattle could be a winning situation for either the packer or the cattle feeder, the analysts said.

For those cattle that are contracted at a fixed price when futures prices were higher, the packers likely sold futures at the time of the agreement to offset the risk associated with the agreement, Keeling said. Calling these cattle for slaughter will net the seller the contracted price, but the packer will be able to buy back his futures contract at a lower price with the profits going toward reducing the actual cost of the cattle.

The effect on open-market cattle prices could be to take them lower, market analysts said. If packers use a higher percentage of contract and formula cattle to fill their slaughter needs, they will use a lower percentage of open-market cattle, back them up in the feedlots and take prices lower over the short term.

Eventually, however, supplies of contract and formula cattle will decline, and buyers will switch back to using open-market cattle, the analysts said. This could boost reported cattle prices later in May, but the degree of any price support likely will depend largely on beef market moves in the meantime, they said.

And beef markets could see some influence from the 2009 A/H1N1 swine flu and market reaction to pork products, the analysts said. Lengthy closure of export markets and a pullback by domestic consumers could pressure pork prices and take beef down as well.