Live Cattle Futures: Prices May be Suppressed in H1 2021

Jan 18, 2021 08:47 PM ET
Live Cattle Futures: Prices May be Suppressed in H1 2021
  • Live Cattle futures have risen by almost 26% in January 2021 despite a sharp decline in the H1 2020.
  • There is an inverse relationship between the price of corn feeds and the prices of live cattle.
  • Prices will decline in the short-term as investors wait to see the stimulus outcome.

Will the Live Cattle Futures overcome negative fundamentals in 2021? This article explores the factors of production and market dynamics.  

Futures for live cattle have undergone significant volatility owing to the changing feed prices, sale of boxed beef cutouts (BBC), and market fundamentals. Since January 1st, 2020, prices of live cattle have risen from a low of $90.00 to a high of $113.213 (per hundred pounds) cwt. This increase represents an addition of 25.79% of the futures price. In the 52-week range analysis, the futures rose from a low of $81.45 cwt to a high of $127.25 cwt (+$45.8 or 56.23%).

Feed prices

Corn, the most popular feed for cattle in the US, is almost headed to highs of $5 per bushel.

Corn prices

Corn prices closed at $4.92 per bushel as of January 11, 2021, a five-year high. Corn-fed beef is expected to hit significant prices since these two, the feed and the cattle are inversely connected. The prices are $0.11 short of the 52-week high range of $5.03. Annual corn prices hit their lowest on August 3, 2020, at $3.08 per bushel-$0.58 cents down from August 12, 2019.  There was an increase in corn production at the time that forced prices to annual lows.

Futures of live cattle increased negatively to the decrease in corn prices due to the high number of live cattle scheduled for slaughter and the live weight. The total number of cattle slaughtered in August 2020 totaled 2.92 million (-1%) from the number slaughtered in 2019. The mean live cattle weight was 1,363 pounds (+37 pounds) from the average weight counted in 2019. A total of 41,100 calves were slaughtered, with the mean live weight at 244 pounds (an increase of 39 pounds from that of 2019). An increase in the average weight of beef slaughtered increases the price of the live cattle futures.

Boxed beef cutouts (BBC)

In the short-term, the cold season in the US may not permit grilling where more beef purchases within the US. Seasonal market demand is expected in the second quarter of 2021, especially for the Choice beef quality grade. Prices are expected to rise from February through May 2021 before peaking in November (Q4 2021).

An increase in these cutouts will reflect an increase in live cattle futures. USDA assesses the prices of cutouts so that producers are able to see the beef prices to introduce in the market. Higher beef prices indicate higher cutout prices. Prices may increase in 2021, based on the positive BBC report by the USDA in the month of January 2021.   

Market fundamentals   

Live cattle, unlike grains, cannot be stored. They have to be transported and sold in the market in a timely manner. Instituting a lockdown and preventing movement will reduce the supply. The demand for cattle is also dependent on income and employment levels. The expected stimulus will increase the flow of money. More purchases are expected, albeit with a decrease in price.

Technical analysis

Live Cattle Futures chart Technical analysis

The 14-day relative strength index (RSI) is at 30.860, indicating strong selling activity among investors.  The stochastic RSI is 0.000, showing overselling among traders.  The 50-day SMA is at 114.365 – a sell position and 114.398 (EMA) also approving a sell position. The ultimate oscillator is 46.936, also supporting a strong sell position in the short-term.

Live cattle futures will plummet in the short-term as investors wait to see the impact of the stimulus and the advancement of the new coronavirus strain. As the dust settles, we expect a rebound before the end of the year. 

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