The January Cattle on Feed report is scheduled to be released on Feb. 22, with the February report to be released on March 8.

With all but the last few days of 2018 slaughter and carcass data available, 2018 beef production totals are nearly final. Total commercial beef production for 2018 is projected at 26.9 billion pounds, up 2.6 percent from one year ago and just fractionally smaller than the record U.S. beef production of 27.1 billion pounds in 2002. Beef production in 2019 is forecast at a record 27.4 billion pounds, up 1.8 percent year-over-year. Total beef production is likely to grow through 2020 at least.

Total cattle slaughter in 2018 was up 2.5 percent year-over-year with steer slaughter down 0.7 percent from 2017 and heifer slaughter up 6.5 percent year-over-year. Total cow slaughter was up 6.8 percent, with dairy cow slaughter up 5.1 percent and beef cow slaughter up 8.6 percent year-over-year. Beef cow slaughter represented 9.5 percent of the herd inventory, a culling rate just equal to the long-term average. Bull slaughter was down 0.4 percent year-over-year and calf (veal) slaughter was up 13.5 percent from 2017.

Steer carcass weights increased just 2 pounds year-over-year in 2018 to 880 pounds. This was a smaller increase than earlier projected. Heifer carcass weights increased 5 pounds year-over-year to 816 pounds. Heifer weights continue to increase relative to steers. In 2018, heifer carcasses averaged a record level of 92.7 percent of steer carcass weights.

Cow carcasses averaged 645 pounds in 2018, up 2 pounds from 2017. Bull carcasses were down year-over-year by 6 pounds to 889 pounds. In 2018, steer carcass weights were 98.9 percent of bull carcass weights.

The modest increase in steer and heifer carcass weights relieves some of the earlier concern relatively inexpensive feed would lead to even higher carcass weights. Data from Kansas suggests feedlot cost of gain increased roughly 5 percent in 2018 but still remained attractive for cattle feeding.

While feedlots have an incentive to keep feedlots full and the feed mill humming, larger cattle numbers with the recent herd expansion also gives feedlots an incentive to finish and market cattle in a timely manner and replace with new cattle. Feedlot ration costs are expected to remain close to current levels in 2019 while feedlot numbers will continue to expand, albeit more slowly. As long as feedlots maintain good marketing rates, beef production will continue to grow in 2019 but at a modest pace.

—Contributed by Derrell S. Peel, Oklahoma State University Extension livestock marketing specialist

Unreflected uncertainty

This issue was supposed to contain a synopsis of the Cattle report. Assuming the USDA remains open, the report has been rescheduled for release on Feb. 28. Knowing inventory levels such as cattle grazing wheat pastures, calf crop levels and replacement heifer levels helps producers make better-informed decisions. It does not seem like the trade became overly concerned about the lack of or lag in getting fundamental information. The futures markets for live and feeder cattle have not been overly volatile, and the forward-looking volatility remains low. Here is a breakdown of the volatility and its implications for protection strategies.

Volatility in this context is how much a price fluctuates over a period of time. One can look back and see how much a futures price has changed over the past 20 or 60 days. One can also look ahead and surmise how much a price may change over a period of time. That is where implied volatility is often examined. The implied volatility is the volatility level consistent with observed or known market parameters.

One can observe futures prices and interest rate levels. One can also look at options on futures and observe strike prices and premium (or option price) levels. For a given option, the implied volatility can be backed out of these observed parameters and would reflect a consensus level expected by the trade. Thus, implied volatility is specific to a contract expiration date and option strike price. Often, at-the-money options are used or referenced because such options are more likely to have trading volume and better or more current information.

What is the current volatility level? Various brokerage and trading platforms provide a calculation of current and implied volatility, but it helps to know what they use. Consider the August 2019 Feeder Cattle contract. This contract and its options will trade until Aug. 29, 2019. The August futures contract has been trading slightly above $148 per hundredweight (cwt). Thus, a put option with a $148 strike price would be at-the-money and was recently trading at $5 per cwt.

There are about 210 days until expiration, and interest rates are about 2 percent. Using Black’s option pricing model, the volatility implied by these parameters is 12 percent, the lowest since 2014 for this time of year. If the volatility were high (low), at-the-money options would be trading at $10 per cwt ($4 per cwt). The low volatility is prevalent across months and for the live cattle contracts also. Thus, market uncertainty is not driving up the cost to lay off price risk when using options.

A related tool, Livestock Risk Protection (LRP), is also affordable at this time when measured using the implied volatility. LRP is currently available on feeder cattle with end dates into late October of 2019.

The premiums move with option prices, so they would also be relatively low. During fiscal year 2018 there were 102,033 feeder cattle insured with LRP. Volume in fiscal year 2019 is not keeping pace with that level. Thus, even though the cost of LRP is low, demand has fallen.  

—Contributed by Matthew A. Diersen, economics professor and South Dakota State University extension specialist