News of a human case of New World Screwworm was merely a shot across the grill of the cattle market last week. This cattle market remains the most dynamic ag market ever seen, as we continue a five-year uptrend that still shows no real signs of stopping.
What happened is Maryland on Monday confirmed a case of New World Screwworm that a gentleman from that state contracted while visiting Central America. I say that without listing the country because reports conflict as to whether he visited Guatemala or El Salvador. Regardless, on Tuesday we saw an opening flash lower in both live and feeder cattle futures, but that weakness was short lived and finished the session mixed in both classes of cattle. Continued resilience has been the major storyline here, as it seems nothing can stop the momentum of this market.
Numbers remain historically low, with the size of the cow herd at a 75-year low and prices making it very difficult to retain heifers. Some data points indicate some light heifer retention is starting, but this isn't at a level that will come close to rebuilding the herd anytime soon.
Meanwhile:
- Brazilian beef imports are currently subject to a 76% tariff, which has basically stopped the flow of that product into the U.S. and causing packers to look elsewhere to find lean product to blend with our 50s.
- The U.S./Mexico border remains closed to the importation of live animals from our neighbor to the south due to the continued threat of New World Screwworm.
Protect the downside
Between limited retention and restricted supplies of both beef and cattle, this market is set up for further strength, as crazy as that sounds. We are repeatedly asked where the top will be or how high this can go and, of course, no one knows the answer to that. Right now, this runaway train shows no signs of stopping.
What a producer can do is protect their investment and continue to hope it ends up being the wrong decision and the market continues to climb. We have options for downside protection:
- Defined risk hedge products are available through put options or Livestock Risk Protection that have given many the opportunity to lock in a break even or better, without breaking the bank.
- Margin calls have been unbearable for many and drawn a lot of futures shorts out of the market. This has just compounded market movement as there becomes less and less sellers to slow the momentum of the managed money funds who continue to hold a near-record long position in both live and feeder cattle futures.
As of this writing, we are marking new all-time highs in live and feeder futures as well as cash trade in the fed and feeder cattle arenas. The national weighted average for fed cattle last week was a record high $244.25 live and $386.17 dressed. Choice boxed beef is also at a record high (barring a three-week spike during COVID-19) and consumer demand for U.S. beef seems to be unfazed at this point. That remains a major concern for cattle feeders as well, wondering when prices become too high for the average American to continue buying beef.
Whether it surfaces in the form of waning beef demand, reduced Brazilian beef tariffs, or reopening the Mexican border, there is cause for concern moving forward. With the dollars required to operate in this industry today, some form of protection is strongly advised. My fear is that as we reach the other side of this cattle cycle, banks will be the largest ranch owners in the country.