Source: Oklahoma State University
THE MARKETS
Packers have now purchased all the available cattle in the south at steady prices with last week of $191 live. Attention will turn to the north where very few cattle have traded and asking prices are higher. Purchases will be for a full week next week followed by two holiday interrupted slaughter weeks.
Processors slaughtered 614,000 cattle this past week up 78,000 from the previous holiday shortened week. It is always difficult benchmarking slaughter volumes from a holiday week. This past week’s slaughter was 24,000 under last year. The fed cattle portion of the weekly slaughter continues to make a larger percentage of the total slaughter than prior years with cow slaughter of both dairy and beef cows in decline.
CATTLE FUTURES. Futures prices moved sharply higher as the discounted futures board attempts to reconcile to the cash prices. There appears a small likelihood of deliveries against the December contract even after the rally yesterday.
Benchmarking. On Tuesday of each week, USDA releases a weighted average price report for all cattle sold the previous week. The report summarizes the distributed price levels for each category of sale such as Negotiated/Formula/Forward Contracts. Beef producers are able to measure the marketing price for their cattle compared to the national averages.
The Comprehensive Fed Cattle Weekly Report offers the most current information on the current status of fed cattle being harvested. The report is published each Tuesday and includes the previous week’s change in carcass weights and quality grading. The latest report shows carcass weights at 914# down 2# from prior week and 13# heavier than last year. Carcass weights will be fundamental in determining total beef production. The combined steer and heifer weights can easily be influenced when the proportion of steers to heifers in the weekly slaughter changes. Quality grade was .2% lower at 82.10%. This was 3% over last year.
The Weekly Steer and Heifer Grading Report is indicative of regional supplies of choice and prime cattle and often is determinative of regional differences is live price. The report is also reflective of the current status of fed cattle offerings in each area.
Forward Cattle Contracts: Forward contracts will always bear some relationship to the corresponding futures month closest to the delivery month for the cattle. Basis levels will move up and down as processors want to add to forward contracts or not. The driver in forward purchases of cattle will always be forward sales of beef. Packers will always be willing to take a price risk off the producer’s plate in return for an extra margin.
Formula and Negotiated Grids. The Price and Distribution Report delineates the various selling methods and net results. The Cattle Contracts Reportdetails the percent of contracts by volume of cattle and by number of contracts for selling cattle. Formula selling that was once the largest marketing method and still is, but is losing ground to negotiated grids where the premiums and discounts are set but the base price is negotiated.
The attention of the market will turn to the middle meats as the holiday season approaches. Beef features will be highlighted by the ribs that will be popular for holiday fare.
The Cutout. The cutout continued higher to open the week. Holiday demand is good and the box prices seem on firm footing. The grind will receive less attention and the middle meats will be more in demand. Ribs are posting new highs for the year. Prices seem to have found some stability at this level.
Replacement markets
The runaway demand of the past few weeks seems to have tempered. Too many people couldn’t make the numbers work and pulled out of the overheated market. Moreover high prices attracted a lot of cattle to the markets. Some of the calves planned for the market next year were marketed early. The sudden change had been driven by new grazing opportunities following generous rains. The jump in calf prices has caused some operators to opt out of this year’s stocker program and take cattle in for grazing. Squeezed margins at the stocker level have opened negotiated pricing for the grazing that is running from .65 cents to .85 cents with care sometimes included and sometimes not.
Competition for stocker cattle has been accompanied by similar results at the feedyard placement level. Cattle feeders are now looking at breakevens from $190-$200 with futures in the mid $180s. Cattle inventories in the feedyard are at a 25 year high but as short supplies of replacement evolve the competitive environment will leave some pens empty.
Imports of cattle from both Mexico and Canada are factors in our stocker and feeder supplies. The discovery of a screwworm cash in Chiapas, a Mexican state bordering Guatemala has caused a disruption and temperary closing of the border. This anxiety is joined with unclear plans for tariffs on imported cattle from Mexico. The implications to re-establishing normal flows from Mexico is not a huge number but is enough to impact prices in a time of dwindling inventories. Mexico crosses around 100,000 head a month to the U.S. and we are at the tail end of the largest volume seasonally. Border officials promise a restoration of normal crossings by year end.
The drought monitor continues to favor herd expansion but the rains never fall evenly across all regions. Broad areas of the plains received welcomed moisture. Many grazing areas will still have time following the rains to see additional growth on the wheat fields. Grazing opportunities have a major impact on feedlot placements but the pool of cattle available for both grazing and feeding continues to decline. News outlets often lag the moisture reports. Drought reports were featured in the news for Oklahoma as rains were covering the area.
Compared to last week: Feeder steers 3.00-7.00 lower. Feeder heifers 2,00 to 5.00 lower. Steer and heifer calves 10.00 to 15.00 lower. Demand moderate to good. Quality mostly plain to few attractive, several large consignments on offer again this week. Supply included: 100% Feeder Cattle (54% Steers, 43% Heifers, 2% Bulls). Feeder cattle supply over 600 lbs was 44%.
Compared to last week’s sharply higher market: Steer and heifer calves sold 5.00-10.00 lower. Demand was good especially for weaned calves with shots. Supply included: 100% Feeder Cattle (53% Steers, 42% Heifers, 5% Bulls). Feeder cattle supply over 600 lbs was 18%
Feeder Cattle Futures. Feeder contracts are a cash settled contract assuring participants prices will close to cash. As the cash index moves higher futures must follow. Futures closed the week Friday with higher prices. The overheated stocker and feeder cash prices will make it difficult for the feeder contracts to maintain momentum to the downside.
The lack of liquidity in the feeder contract provides a perfect environment for prices to move too far in either direction. Poor liquidity leads to extreme volatility. Overdone directional price movements frequently require corrections and traders sense the vulnerability of the contract that needs to be cash settled but the contract index needs a redo.
Feeder Cattle Cash Index. The index is tracking the moves in cash prices.
Video and Internet Replacement Cattle Auctions. The movement from traditional private treaty sales to Internet auctions has been slow but steady. Producers have chosen this option as the primary marketing tool for most of the cattle offered in the replacement markets.
National Weekly Feeder Summary released on Friday of each week tracks the national prices by region for last week.
Grain Futures. Corn prices moved higher following a government report lowering the ending stocks of corn. The continued marketing of cattle with more days on feed is using more corn. Corn basis levels in Guymon, Oklahoma are at $1.20 — basis the December contract.
FUTURES AND CASH PRICES DIVERGE
There is nowhere to look to find what percent of beef producers are hedged. Asking cattle owners is a lost cause because they often obfuscate or outright lie. There are some obvious tools to render reasonable assumptions on the presence of hedged positions. The most common indication is the influence of moves in the futures market on changes in the cash prices. Hedged producers who can profit when futures price fall more than cash bids will often let cattle go to market even at lower prices.
The recent decline in the futures market witnessed very little influence on cash prices that in fact firmed. Fed supplies are tight and fed prices near a breakeven, so many producers are holding for higher prices. This inclination seems supported by a cutout that seems on firm ground from good holiday demand. The sharp decline in the year over year cow slaughter has forced the processors to rely more on the fed cattle for slaughter needs.
It is reasonable to assume six months ago when today’s inventory was placed on feed, hedge margins were non-existent. Few operators are willing to hedge in a loss at the beginning of a feeding venture. They would prefer to bet on the come. Everyone knows at some point this form of speculation will come to a bad end. The large feeding companies are left in a lurch forced to lock in negative margins until the individual feeders get knocked out. The large feeding companies don’t sell in the cash markets so when independent operators ignore declining futures and hold for higher prices, the feeding companies profit from improved basis levels.
The setup for today’s replacement cattle placed on feed or pasture is a mirror picture of the disparity between futures and cash. The short supply of replacement cattle will continue to squeeze all beef producers whether in the feedlot or outside. Competition for the continuing short supply will force overpay for new purchases and negative margins against the futures contracts well into the future. For some reason, after each end of an inventory cycle, there never seems to be a soft landing.
CATTLE REPORT LIBRARY
Change is a necessity for any sustainable industry and sometimes necessary changes encounter obstacles in the form of stalwarts who refuse change. The Cattle Report has created a library page of opinions pieces published on these pages advocating fundamental and structure changes for the industry.
NOTE TO READERS
Sections of the newsletter are designed with hyperlinks to the appropriate source pages. The hyperlinks are in light blue within the report.
EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES
Regional differences in grain and cattle basises create a difficulty in modeling a national composite for current close outs or a proforma forward look at a breakeven. Readers should consider your own area for adjustments to these models. Most calculations are basis relevant prices in Guymon, Oklahoma.
CURRENT BREAKEVEN PROJECTION
The Cattle Report introduces the FEEDER METER. The report estimates profit or loss for currently purchased feeder steers and projects a result 180 days out. The chart is interactive and updated every 15 minutes in real time based on changes in futures markets in grain and cattle. Corn basis information is based on current trade prices adjusted every two weeks. Feeder prices are based on the USDA index price for 800# steers and fed cattle sales are $2 cwt. premium the appropriate futures contract.
CURRENT CLOSE OUT
The Cattle Report estimates current profit or loss on cattle placed on feed 180 days ago. This report generated from industry averages attempts to simulate a typical close out based on the feeder index for 800# steers 180 days ago. The close out assumes grain was purchased at market each month. Selling prices and interest rates are based on prevailing benchmark quoted prices. This chart will change weekly.
