Are Cattle Markets Weather Derivatives?

• Roughly 67% of all cattle on feed in the US can be found in Texas, Nebraska, and Kansas. 
• Much of this area was under an extreme heat index advisory, bringing about an animal comfort stress warning this past weekend. 
• While the live cattle market did not react as expected to start the week, there is a lot of time remaining before the closing bell Friday. 

Usually, we talk of commodities as weather derivatives the conversation has to do with agricultural production markets. Normally the focus is on the grains and oilseeds, with King Corn and Queen Soybean often taking center stage, though the past year has seen a constant relay race being held by the various softs markets. Along the way we saw coffee hit its highest price since September 2011 during February 2022, followed by cotton reaching its highest mark since July 2011 during May 2022. Then there was a bit of a lull as the latest La Nina played out, until sugar made a run during April 2023 to its highest price since October 2011. Here in July 2023, we’ve seen both cocoa and orange juice (frozen concentrate) rocket higher, with September orange juice (OJU23) hitting a new all-time mark of $3.0990 (per pound). All of these moves were driven by adverse weather, at different times and places around the world, reducing supplies while demand remains strong. 

But what about livestock markets? Are the big three (live cattle, lean hogs, feeder cattle) considered weather derivatives as well? I believe they are. History has shown us how hogs can fly when it gets brutally hot or cold across the US Midwest, particularly northern Iowa and southern Minnesota. Hogs tend to not do well when weather hits extremes, and the market reflects this. But what about cattle? 

Those who have watched the markets for years know a bad blizzard across the US Plains will bring buyers into the feeder cattle market on the idea there will be death loss of the storm is bad enough. In the Southern and Central Plains you have the three largest states for cattle on feed of Texas (reportedly 2.9 million head or 24% of the US total), Nebraska (2.7 mh, 22%), and Kansas (2.5 mh, 21%). 

As I watched weather forecasts roll in over the weekend, the item that jumped out at me was an “animal comfort stress” warning was issue for these three key states (along with western Oklahoma). I mentioned at the time how this should bring the weather derivative nature of the beast (cattle) to the forefront, with someone in the industry adding how he had learned form an “old feedlot man” that cattle don’t get back pounds lost to stress. I believe him. The cattle industry is filled with folks who know which end eats and which end gets rid of what is eaten, though the same cannot be said for many of those who talk about the market. It’s at times like these I miss my late friends, two stalwarts of the industry, John Harrington and Walt Hackney. 

Given all this, I was expecting the live cattle market to jump at Monday’s open, regardless of USDA’s July 1 cattle on feed and inventory numbers released last Friday afternoon. Instead, August live cattle (LEQ23) opened $1.025 lower, October (LEV23) down $1.15, and December (LEZ23) was off $1.00 with all showing light trade volume to start the week. Part of me had to laugh at this development, as cattle (both the animal and the market) are known to be ornery. Does this change my idea about cattle as weather derivatives? No, because of something I learned from another late friend and long-time floor reporter Gary Wilhelmi, “The only price that matters is the close”. 

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