The trend over the past month in feeder cattle futures prices has been negative (bearish) for the April, May, and August contracts. This follows a month-long increasing (bullish) trend to start 2018.
A quick futures refresher: the prices associated with each contract above come from the futures market. Futures contracts are exactly what the name implies: a contract for something at some point in the future. These contracts expire during the contract month. So if you purchase an April 2018 feeder cattle contract at the current price of around $140 per 100 pounds (cwt), you must to sell or settle that contract sometime before or on the last Thursday of April. Unlike some contracts where you can deliver the physical commodity to settle the contract, feeder futures are cash-settled.
The structure of futures contracts allows for market participants (i.e. hedgers and speculators) to take positions on prices in the future. If you think that price will be higher in late April than the current price, then you can buy a contract and hold it hoping it will go up. If you think it will be lower, you can sell a contract and hope it goes down. It can also be used as a risk management tool for producers wanting to minimize price risk. If you purchased a load of stockers that you plan to hold until May, the futures market can be used to hedge by selling a May contract (50,000lbs). If prices go up, that’s bad for your futures contract but good for your stockers. A hedge swaps price risk for basis risk (i.e. the difference in cash and futures prices). To calculate basis for any given time period, just subtract the closest-to-expiration futures price from your local cash price.
A key benefit resulting from futures markets is that it allows forecasts based on market information. The current price for the August 2018 contract of $145 is the market’s estimate of what feeder cattle prices will be on in August. We can take that price, add in the estimated local basis, and arrive at a market estimate of cash prices. Using Mississippi as an example: the average basis (cash minus futures) during the month of August over the past five years has been about -$17 per cwt for 700-800 pound steers. If we expect that to be true this year, then the current August 2018 futures price suggests a forecast of $128 for those steers in August of this year. The same process can be used for other contract months, too.
The bearish trend of late is a signal of concern of feeder price weakness as we approach and enter the summer months. The same May 2018 contract that was worth $152 on February 16th was only worth about $139 today.