The Market's Fine Print

"So green it makes your eyes hurt," replied my old rancher friend when asked about the state of early summer grass.

Since he was normally a man of few, minimally suggestive words, I was surprised by such a gushing report. Furthermore, here was a rode-hard veteran of the Nebraska Sandhills who was painfully aware of how quickly the promising blush of spring pasture could deteriorate into a sea of blow-outs.

As my Dad used to say, the production heroes on the far side of the 100th Meridian are bred more for caution than premature enthusiasm.

And yet this almost poetic note of optimism fit well with the USDA's latest round of pasture and range rating released on Monday. As of the week ending May 29, 88% of Nebraska grassland was judged to be either good (71%) or excellent (17%). Perhaps even more impressively, not a single catch pen was rated below poor.

Statistically, I can't swear on a stack of soggy Bibles that this wet spring represents the best ever grass inaugural. Yet my personal database of official readings goes back to 1996, confirming that early pasture prospects in Nebraska haven't been this good in more than 20 years.

Much the same can be said of the following major cattle states: Colorado (67% good/excellent); Kansas (74% good/excellent); Missouri (55% (good/excellent); North Dakota (71% good/excellent); Oklahoma (54% good/excellent); South Dakota (81% good/excellent; Texas (67% good/excellent).

Of course, none of this means that ranch country won't be wracked with drought by midsummer. Yet it did lend short-term credence to my friend's positive assessment, explaining why he was so unusually upbeat in the face of so much uncertainty ahead.

Actually, the real purpose of his call was considerably weightier than the ephemeral state of new grass. Rather, he was looking for help in hardening a more bankable optimism. What did I think his short 600-pound steer calves would bring this fall?

Pausing briefly to gather my thoughts, I could see the market screen was once again papered from top to bottom with minus signs. The country may have been as green as a gourd, but the current CME playing field looked more like the Sahara Dessert.

"Where were you in early March when I was smarter and the market $15 higher?" went my opening gambit.

"Probably serving as a sleep-deprived midwife to first calf heifers," he growled. "Weren't you going to call if something in the market changed?"

"Sorry, my friend," I said apologetically. "Even if I had remembered, the late winter price died of a thousand cuts. Every day I thought it was due to stabilize, the market lost another dollar."

"That's bearish water under the bridge," the cowman granted. "But how should I plan for my big payday this fall? Sell early, late, contract, hedge, direct, video? Hell, maybe I should just drop the keys off at the bank."

Taking a deep breath, I began to give him my two cents as to where the feeder market was likely headed over the next six months.

Let's start with the fact that ranchers have delivered the lion's share of the largest calf crop to hit the ground since 2010. My guess is the final total for 2016 will be close to 35.7 million head, nearly 4% larger than last year. Given the relatively open winter, the new freshman class could even be a little larger.

Next, seriously weigh convincing signs of expansion in virtually all livestock categories. Per capita meat consumption is set to steadily march higher over the next 18 months. Total meat production could grow at an even faster pace depending upon the size and price tied to the 2016 feed grain harvest.

I think ranchers need to be realistic about the stressed equity status of the feeding sector, and what that precarious reality means for them in terms of doable (i.e., finance-worthy) breakevens going forward. Having said that, if feedlot managers choose to purchase 550 pound steer calves this fall for $175 (i.e., roughly the current market), current June 2017 live futures indicate they will be planning for failure to the tune of $100 per head.

Finally, the uncertainty of corn costs tied the new feeding year strikes me as a major risk. While the potential production of a record 14.4 billion bushels of corn this fall could theoretically be quite supportive of calf and yearling values, strong export demand (as we are now seeing) could significantly offset the bearish potential of a big harvest. And what happens if the growing season finds serious trouble and export demand remains very strong?

At the end of our conversation, I told my friend that if they were my cattle, selling early rather than late would probably invite less downside price risk. More specifically, I suggested that a contract inked between $165 and $175 would likely look quite respectable by the time Thanksgiving rolled around.

I could sense a great deal of disappointment when everything was said and done, especially given how jazzed he was about the promise of summer grazing. What can I say? Be careful which side you ask for an opinion. The grass is not always greener.

For more from John see www.feelofthemarket.com

(CZ/)

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