THE MARKETS

 

 

 

January 15, 2021

 

CATTLE MARKET REPORT AND ANALYSIS

  

 

PLAINS MARKET TALK

 

            

Cash Cattle

 

Cash cattle prices are working lower as boxed beef prices are working higher -- not an unfamiliar pattern. In the north cattle that traded for $110 Tuesday, sold for $109 Wednesday then $108 yesterday. In the south cattle that were trading at $111 Tuesday and Wednesday morning turned to $110 by Wednesday afternoon with $109 bids on Thursday. Dressed trades at $174 turned into $173 then $172. All prices are $1-3 lower.

 

There remains a number of farmer feeders in the corn belt. These are operations where cattle are not always a component of their business model. During periods of low corn prices, they market corn through cattle inventory. When corn prices rise, they sell corn. The speed with which some of these operators accepted lower bids this week from the packers, reflects their inclination to sell cattle now and take the corn left in the bin to market.

 

President-elect Biden announced a $1.9 trillion dollar aid package -- an enormous spending bill by any standards. The $1400 individual payments and the $400/week unemployment supplements will allow more disposible spending at the individual level and certainly some of that spending will target food and beef. There is little question that a Democratic Congress with a Democrat in the White House will set a new course for fiscal policy and budget deficits.

 

Cattle Futures. Futures prices were modestly lower in the front end and higher in the deferred as traders change trading strategies becuase of changes to grain prices.   

 

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 up 3# at 893# which is 11# over last year. Quality grade grading was up .6 at 82.90%. This was the third highest grading percentage in history. Seasonally grading reaches its peak in February.

 

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. Sometimes the forward contracts are associated with forward sales of beef and sometimes not. Packers may simply try to add an extra margin for taking the price risk off the hands of the producer. 

 

Weekly graphs on the Comprehensive Weekly Fed Cattle Report break down the categories of trade for the week according to 1) formula cattle; 2) negotiated live; 3) negotiated dressed; 4) and forward contracts. Some cattle included in the formula category are week to week negotiated grids and not committed cattle to one plant. Other cattle designated as formula are "over the tops".

 

The Cutout. Box prices continued to move higher. The choice/select spread has narrowed as it does seasonally. This past week's slaughter was 651,000 topping last year by 5000 head but topping beef tonnage by more because of larger slaughter weights.

 


 
Choice CutoutChoice Price Change
212.92Down $0.45
 
Select CutoutSelect Price Change
203.08Up $2.01
 

 


 

 

 

Beef Feature Activity Index. Holiday clearance was good for beef across the country. Retailers are now focusing on this year. Grocers would like to hold on to the meat margins caused by stay at home orders, but as vaccinations increase and hotel/restaurant service is restored, the market will become segmented.

 

 

Replacement markets

 

The large supplies of fed cattle coming to market is putting a lid on fed prices and making buyers of replacement cattle more cautious. Runaway feed costs is joining the pressure on stocker and feeder prices. Rains across east and south Texas areas expanded to the north providing rain and snow across much of the eastern United States. Drought areas remain in the southwest. Three months of smallers feedyard placements will leave empty pens looking for cattle, but failing futures will make buyers cautious.

 

Oklahoma City. The auction markets pushed higher with most classes of cattle gaining $2-5. Steer offerings managed to hold better gains than their heifer mates.

 

Feeder Cattle Futures. Feeder futures stabilized. The direct relationship between feed cost and feeder cattle cost was front and center.

 

Feeder Cattle Cash Index. The index is tracking the moves in cash prices.   

 

Forward cattle contracting. Feedlots, with much uncertainty about feed costs, are becoming reluctant to be active in the forward markets or are lowering their basis bids. Stockers operators are making regular inquiries about basis levels in the hopes of pricing cattle that will hold margins together.

 

National Weekly Feeder Summary released on Friday of each week tracks the national prices by region for last week.   

 

Grain Futures. Corn posted additional gains on Thursday but backed off early Friday morning. USDA reported sharp reductions in crop yield as a larger sampling of the last harvest found its way to the report. As corn moves higher, the carry built into the deferred contracts is disappearing. Basis levels are firm at year end but may weaken next week. Current basis trades are for Nov/Dec corn 85 over the December board in Guymon, Oklahoma. Corn is now pricing into ration at $10.75 cwt. in the Oklahoma Panhandle.

 

A 3.8 bushel reduction in the corn yield is the largest reduction by USDA in 25 years. Corn and soybean stocks are going to remain tight for the foreseeable future. Higher grain will impact all meat products and prices and are a sign of impeding inflation risk. They also provide generous incentives to farmers to ratchet up corn production this spring.

 

 

TRADING PIGS IN CHINA

 

 

The Dalian Commodity Exchange offered the debut of China’s first live hog delivery contract. The prices are traded in yuan per tonne. It is not surprising to see China open trading on a hog contract when they are the largest producers and consumers of pork in the world. China produces on half the world’s pigs. China slaughters around 700 million pigs a year.

 

China’s pig population was decimated by the Chinese swine fever outbreak in 2018 and the industry has been recovering since. The recovery has been anything but slow. China’s recovery featured new efficient sterile pig installations replacing antiquated hog farms of the past. The move has been fast and new production is coming on stream daily quickly replacing the lost production. Production is moving from small farmers to large agribusiness companies.

 

As the Chinese swine fever spread around the world, global pork supplies dwindled, and pork prices skyrocketed giving a large incentive for rebuilding. Much of the demand from China for soybeans has originated with the demand from new pork facilities hoping to capitalize on high prices. The quick response of rebuilding may have overshot the mark and pork prices in the Chinese market have fallen in early trading sessions on the Dalian exchange. Margins are higher than commodity margins in the United States.

 

World-wide shortages of pork may have provided an opening for a taste for beef with Chinese consumers. Beef imports into China have jumped and domestically China has very little infrastructure for beef production. That is not to say the Chinese are unable to build a beef industry but currently it is an opportunity to move a lot of our beef their direction and this is occurring now.

 

China will always take advantage of global commodity opportunities regardless of politics or trade deals. They can be expected to buy when they need a agriculture product or not buy when they don’t. They shouldn’t be expected to have their trade policies dictated by other countries. The buying is top down and under the control of a command economy that finds direction from the top instead of multiple smaller purchasers. Currently the United States joins South America as major suppliers of beef and pork interrupting the long standing trade relationship with Australia. This is because of the reduction in the Aussie herd from drought.  

 

 

 

CATTLE REPORT LIBRARY

 

Below are links to articles published in the Cattle Report pertaining to industry change. Two important changes are on the table for progress -- supply chain management and animal ID. Both applications will transform and disrupt the industry.

 

THE BEEF BLOCKCHAIN

 

THE BEEF BLOCKCHAIN SLIDE SHOW

 

The Case for National ID for Cattle

 

Reforming the Futures Contract and Cash Trading of Cattle

 

 

NOTE TO READERS

 

Sections of the newsletter are redesigned with hyperlinks to the appropriate source pages. The hyperlinks are in light blue within the report.

 

 

 

 

FURTHER NOTES AND 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. 

 

 

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 150 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 and fed cattle sales are par the appropriate futures contract.

INPUTSTOTAL$$CWT
750 # Feeder Steer1,009.35134.58
Cost of Gain 600 pounds638.191.06
Estimated Interest(Prime + 1%)27.10 
Current Breakeven1,668.35123.58
Current Futures1,569.78116.28
Net Profit / Loss-98.57-7.30

CURRENT CLOSE OUT

The Cattle Report estimates current profit or loss on cattle placed on feed 150 days ago. This report generated from industry averages attempts to simulate a typical close out based on prevailing purchase prices for a feeder steer 150 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.

INPUTSTOTAL$$CWT
750 # Feeder Steer OKC 150 days ago975.00130.00
Cost of Gain 600 pounds571.180.95
Estimated Interest(Prime + 1%)22.02 
Resulting Breakeven1,568.20116.16
Current Texas Panhandle Cash1,510.92111.92
Net Profit / Loss-57.28-4.24

 

 

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