Unraveling the Cattle Market Rollercoaster

Causes of the $24 Surge and the Sudden Plunge – A Lesson in Risk Management with Buffalo Feeders

From May the 8th, 2023 to September 28th, 2023, the October Live Cattle futures contract rallied $24.00 or $300 per head and the Cash Market had followed it all the way from low $160’s to $185 last week. This rally was fueled by the belief that the availability of market ready cattle would be well below what the demand was from packers. This has proven out over the summer and early fall.  But with all good things, if they don’t come to an end, at least they might at least get stalled out.

What are a few of the causes of the advance and rapid decline in the last few days:

1.     When the cattle market was advancing, the open interest was increasing. This means money flow into the cattle market was coming into the bullish environment and typically, the market goes up when that happens.  Many of these investors are managed money funds that make large investments compared to most commercial producers.

2.    When the Geopolitical “external”factors get unstable, many of these investors move their money into a “risk off” or move it out of the markets.  When this happens, the markets typically go lower.

  a.    On 10/2/23 the President signed the CR keeping the government from shutting down.

   b.    On 10/4/23 Representative Kevin McCarthy was removed as the Speaker of the House.

   c.     On 10/7/23 Hamas invaded Israel in a significant attack throwing the middle east into turmoil.

3.    As these events were taking place, the market was working lower, and open interest was coming out of the market.  Weakness was apparent, and then the monthly Cattle on Feed Report was released by the USDA, and it showed a future inventory of cattle that was bigger than the industry was expecting. (see the report below)

Cattle On Feed Estimates Report - October 20, 2023

October Live Cattle Index

When you look at the larger picture, the market advanced $24 and pulled back $10 on the COF report then recovered $4.  This is a 38% retracement of the larger $24 rally from May.  It’s important to remember that the last cash trade in the Kansas, Oklahoma area was $185.00. Initial bids this week started at $180 and $182.  However, most cattle producers are thinking that the current supply situation this week is no different than that of last week and are pricing their cattle and even to better than last week.  When the cash is above the futures market, that is a positive or strong basis and for the hedgers of cattle, they are rewarded for selling their cattle because the basis is adding value back into their cattle profits.

Volatility in the markets and the uncertainty in the world and in our own country are reminders that RISK MANAGEMENT is always important and will allow you as a producer to manage your profits and reduce the risk of external factors to the markets.

If you would like to talk about how we help customers manage the risk on the cattle they feed with Buffalo Feeders, just give us a call or email and we will walk through how you can improve your returns on the cattle you feed.

~Tom Fanning

Manager, Buffalo Feeders

Office: 580.735.2511

November 2, 2023
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