After being disconnected from the U.S. futures market for almost two years, Canadian cattle producers may be keen to jump back in.
But while the U.S. Department of Agriculture seems committed to reopening the border on March 7, producers interested in using futures to hedge their sales should look before they leap.
“If you sell futures (now) and something comes along to derail that (border opening) date, you could get caught with the Canadian price going straight down and the futures market going straight up,” said Ken Ball of Union Securities in Winnipeg.
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Analysts say U.S. cattle futures prices will likely decline slightly if the border opens on March 7 because those who had bet against the border reopening will fold their hands and leave the game.
“There may be an initial reaction downward, as traders bail out of speculative positions,” Ball said.
As well, the border opening may have a short-term psychological impact.
In that light, cattle futures prices on the Chicago Mercantile Exchange might look attractive, but analysts said the overall impact of a reopened border might not be that great. Cattle older than 30 months will still not be allowed over the border and the number of Canadian cattle entering the United States may simply reduce the amount of boxed beef imported from Canada.
Overall, North American supply and demand of beef may not be affected.
Ball said producers who want to protect today’s cattle futures market prices because they are scared of a drop once the border opens should consider buying put options rather than futures. Options don’t lock the buyer into any obligation beyond the premium cost.
Analysts say the cattle market will probably continue to be volatile through the spring and summer as it settles down after such a long period of supply and demand disruption.
James Robb of the Livestock Marketing Information Service in Lakewood, Colorado, said the American beef market has been volatile for months because of the border situation, but that volatility is beginning to settle. The U.S. agriculture secretary’s announcement last week about which cattle will be allowed in after March 7 is probably having a calming effect.
“That uncertainty that has been around has been cleared up to some extent by the secretary of agriculture,” Robb said.
Commentators have focused on agriculture secretary Mike Johann’s decision to not immediately open the border to beef from cattle older than 30 months, but Robb said the market saw the announcement as verification that the border would be opened to most fed and feeder cattle. Most traders no longer expect the border to be closed after March 7.
“This is a final rule (of the USDA),” Robb said.
“I don’t think the House or the Senate will want to move forward with their ideas. This is as close to a done deal in the rule-making process in the U.S. that I can imagine.”
Robb said he expects Canadian feedlot placements will increase immediately and the price differential between U.S. and Canadian beef markets will gradually fade as trade returns to normal.
