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This year, you will be hearing a lot about captive supplies and the possible effect they have on cattle price. Captive supplies are any cattle that are sold to packers on a pre-arranged basis. Forward cash contracts, grade and yield and grids fall into this category. Since captive supplies have become a significant part of cash sales, I want to address this issue to help you understand some of the fundamentals behind this new element. Over the last few years, I've studied captive supplies and I think that in general, captive supplies can and do have an adverse affect on price. However, I also think that producers have allowed the increase in captive supplies to occur in some cases. It may be that the Banker won't let the producer feed cattle unless he locks in a price or the producer feels he is making the best decision for his own financial well being. Whatever the reason, the volume of captive supplies has risen to a level (up to 50% on average) that price is no longer the pure result of supply and demand. 
Each week, cattle sales are reported as well as "additional volume" (captive supplies) by the USDA. The chart is based on a four-week rolling average of USDA's weekly data. Prices are a four week average of the practical cash top price for the week reported by feedyards. In 1994, captive supplies ranged from 10 percent to the upper 20's. During 1998 the range increased from 20 to 30 percent for the most part and 1999 increased to a range of 30 to 50 percent. Notice that in 1998, after a surge in captive supplies took place, cattle producers experienced declining prices. During 1999, after another surge in captive supplies, cattle prices increased. The relative difference between 1998 and 1999 is the liquidation of the cattle herd in response to low prices and increased domestic demand here in the US. Some analysts in the industry indicate that captive supplies may be depressing price by at least 10 percent. 
But captive supplies are not the only pro- fit-robbing element of cash cattle price. The Farmer Share of Retail Price is released monthly by the USDA. This percentage is the value of the live cattle in the retail meat case. This value has been declining since the mid 70's. The chart below shows the Farmer Share of Retail versus Nebraska Steer Price as reported by the USDA.Estimates are that the reduction in the Farmer Share of Retail amounts to $100 to $250 per head loss in income for the producer. As much as I would like to think that retail price goes down when cash cattle go down is simply not always the case. Changes in retail prices, in my view, are a delayed reaction and not equally proportionate in up or down markets. I think that retail price responds slowly to cash cattle price declines and quickly to cash cattle price increases. All in all, retail price trend is generally always upward regardless of cash cattle price. The US is in a period of time when supplies are beginning to tighten and the import/export picture is clouded. Remember that the US must import cattle to supply domestic demand, as has been the case since 1970. In my opinion, anybody that tells you we have an over supply of cattle doesn't know what they're talking about since the US must import cattle or beef to meet demand! It appears the packers use captive supplies to their benefit. They kill the captive supplies before paying more for the other cattle in the up markets. Sometimes this strategy will weaken the market enough that they pay less for the non-captive cattle. If you don't cash contract cattle, I think buying put options may be the best way to handle getting caught up in the trap of having to sell your cattle when packers are killing captive supplies and depressing prices. So how do you market cattle with this knowledge? First, begin to understand that the price structure at the retail level is not likely to change any time soon. Our city cousins are so far removed from the farm that the average consumer has no idea that retail price is not responding to lower cash cattle prices. Second, as far as cash contracts, grade and yield and grids are concerned, understand that the writer of a contract is always the one with the advantage. Be sure to question the motives behind the contract before giving your approval because in most cases you may be signing away the ability to participate in higher prices. If you sign a contract that establishes the cash price for your cattle I suggest that you buy call options so that the topside is opened back up until the cattle are delivered. That way, if price increases, you have the chance to participate. If price declines, then your cash contract was a wise decision and you loose the cost of the call option. Generally speaking, I think that during the year 2000, the market will either accept the concept of captive supplies or deny ownership of cattle in any form by the packing industry. I am fearful, however, that captive supplies will continue to be accepted because of a lack of knowledge and understanding about the affect captive supplies has on supply and demand. Supply and demand always works at finding the "right price" if it is not interfered with. In the case of captive cattle the ability to interfere with the balance between supply and demand is becoming too obvious to ignore when making investment and marketing decisions. Learn all that you can about this important issue and decide for yourself. Schwieterman, Inc. is a Registered Commodity Trading Advisor in Garden City, Kansas. The information herein is based on data obtained from recognized statistical sources believed to be reliable. However, such information has not been verified by us, and we do not make any representations as to the accuracy or completeness. Past results are not necessarily indicative of future results. The risk of loss in trading commodity futures contracts can be substantial. You should therefore consider whether such trading is suitable for you in light of your financial condition. |
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