March 18, 2024

THE MARKETS

Cattle owners will continue to press for higher prices this week. Processors should benefit from a kick in spring demand for beef that will cause retailers to push inventory levels higher in anticipation of improved demand. Slaughter levels moved higher last week and may be higher again this week. Improved basis levels should encourage a larger slow list this week.

Northern premiums crept back into the cash trade this past week. In the north cattle traded from $187-190 — mainly $187-$189 with some Iowa sales at $190. Dressed sales ranged from $295-$301 with the bulk at $298. In the south cattle owners struggled and were unable to acheive pricing above $186 live. Given this price spread it will not be unusual to see northern plants dip into Kansas next week for purchases.

This past week marks Week 4 of a near or sub 600,000 head slaughter volumes. It also reversed the downsloping trendline of slaughter volumes increasing the slaughter 18,000 over the low of 583,000 head. The slaughter was 27,000 under last year. Processors margins continued to struggle with box prices gaining insufficient ground to match the necessary margin for a profit.

Cattle Futures. Futures prices barely stayed in the green with deferred months posting modest gains. The adjustment to April left basis levels close to par.

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 887# up 10# from prior week and 22# 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 up .3% at 84.30%.

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 Report details 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.

Beef Feature Activity Index.

The stable of beef production is the grind and much of the grind is produced from cows. Most of beef is sold as grind and the flucuations in price are smaller and the cuts cheaper than many other beef cuts. It becomes a barometer for beef pricing and then during certain times of the year the more expensive cuts like middle meats gain or lose popularily causing fluctuations in the composite cutout.

The Cutout. Box prices firmed in late week trading.

The news in the beef business is the steadily changing impact of smaller domestic supplies on the foreign beef trade. As expected beef exports are declining while beef imports are increasing. The shortages of lean cow beef from reduced cow slaughter is being met by the purchase of those products from South America and Australia.

Replacement markets

The short supply of replacement cattle has pushed current cash prices up beyond springtime futures prices. The same squeeze experienced by feedlot operations is now transferred to the stocker operations. Over priced current purchases leave no margin for error for grazing margins. This will tend to apply pressure to grazing fees that have not fallen with the lower grain prices. The one factor that is unchanged is the moisture requirement for successful grazing operations.

One notable statistic is the decline currently being reported in feedlot arrival weights. Recent placements are averaging 50# under last year. This is driven by cheaper feed and competition from the feedlot for production pounds that now are frequently cheaper in the feedlot than outside on pasture. One implication of lighter placement weights will be longer durations in the feedlot to reach target weights. Already dairy cross placements have slowed feedlot turnover.

Market observers will begin to look for signs of a reduction in heifer placements on feed. This will signal the beginning of the herd rebuilding. Heifer retention also will reduce the calf pool available for grazing and growing. Conditions are now right for the rapid rebuilding of the nation’s cattle herd. The ommission of a breakdown by sex in the monthly COF reports by USDA is an oversight in need of correction.

Oklahoma City. —

OKC West  —

Feeder Cattle Futures. Futures recovered almost half of the previous day’s losses.

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 closed the week with gains. There remains a lot of distance between now and next fall’s harvest. There has been some movement from corn to wheat in feedlot rations. Continued interaction between the two grains will increase the corn carryover and reduce the summer basis for corn. Corn basis offerings in Guymon, Oklahoma are at $1.20 — basis the May contract.

BEEF AND FOREIGN TRADE

The value of the dollar against a basket of world currencies is available daily and is an exchange traded product. The dollar is off recent highs but remains strong against most world currencies. When it comes to the beef trade, the important determinative pricing factors are the value of the dollar against the Chinese Yuan, Korean won and Japanese yen.

The foreign trade in beef is critical to the stability of our beef markets and the trendline direction of imports and exports is often partly responsible for the cutout prices and indirectly live prices for cattle. The trendlines during low points in our cattle cycle change direction. As one might expect, imports are up and exports are down. The magnitude of these numbers is a fundamental force in the dynamics of the daily beef cutout prices.

In 2022 beef exports reached a record high of 3.5 billion pounds. Those numbers declined in 2023 by 14% and will be followed this year by another decline of at least 10%. Total dollars of beef exported in January of this year was $725,000,000 – up from last because of the high price of our beef but down from last year in volume. Japan continues as the largest purchaser of U.S. beef followed by South Korea. Somewhat confusingly Hong Kong is reported separately from China. The Asian markets are solid buyers of our beef because of the high quality and heath standards.

Meanwhile, our beef imports are surging due to the loss of lean beef from a dwindling cow slaughter. Both dairy and beef cow slaughter are forecast to be down this year. The U.S. imported 4 million pounds of beef in January of this year –up 10% from last year and a record high. Brazil continues as the largest supplier of imported beef followed by Australia. We spent almost a billion dollars on imported beef in January – up 36% from last year.

It would be a mistake for the U.S. cattle industry to suggest we cut off beef imports to support our cash prices. Beef exports will moderate on their own due to high prices. It is critical that beef maintains a respectable marketshare in our retail markets as beef prices itself well above competing meats at 2x pork and 4x chicken. The last result we would want in the low point of the cattle cycle is to destroy eating habits and force consumers to find other options for meat in their diet.

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.

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