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No Secret Why Cattle Are Stampeding

It’s not Billy Crystal’s coffee grinder that’s spooking the cattle.

CME Live Cattle

LiveCattle

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Barry Ritholtz had an interesting post on Cattle prices. Yes, beef is going to cost more, because protein is going to cost more. But not the protein you think, but yes, that protein will go up in price too. Get it? Read more…

Cattle need to be fed protein so they can be fattened up so they can, of course, be slaughtered. That protein comes from corn, wheat, or soybean meal for the most part. That’s the first “protein” above. All of these commodities trade at the CME and CBOT. You can follow the CME Group on Twitter with the @CMEGroup handle.

Each of these commodities has a percent protein by weight. The feedlotter needs to be aware of the costs of the cattle feed protein. If the grains and oilseeds have bearish supply numbers, then higher cattle prices are going to follow. That’s the case today.

If you look at prices for live cattle, soybean meal, corn, and wheat, you’ll see (in the charts below) that they’ve risen quite dramatically compared to cattle prices themselves. Since June 1, 2010 prices have risen accordingly:

Live Cattle – 15.36%
Soybean meal – 52.63%
Corn – 68.06%
Wheat – 52.11%

Corn looks to have appreciated the most, so entities that need protein will look to find a cheaper cost of protein by weight that what their afforded via corn. Remember corn and wheat trade in bushels, which is volume, not weight. Soybean meal trades in metric tons and cattle in pounds.

Some sharp pencil will figure out a model to take advantage of this, as well as how much the increase in protein from grains and oilseeds will result in an increase in live cattle or feeder cattle.

The second protein is from fish, chicken, or pork. If cattle prices rise, the substitutes might rise from all the new buying that otherwise would have purchased beef because the substitute is cheaper – pound for pound.

If feedlot protein costs rise, or are expected to rise, feedlotters can buy grains and oilseed futures to hedge their costs. If the price of their cattle rise, they may decide to hold off selling cattle futures today, in order to take advantage of higher prices in the deferred months. That can lead to a one-sided market if there are only long speculators and no commercial selling hedgers.

CBOT Soybean Meal

marchsoybeanmeal

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CBOT Wheat

cbotwheat

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CBOT Corn

marchcbotcorn

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  • Peter Rich

    Another great post…thanks!