PLAINS MARKET TALK
In a surprising turnaround in the live market, live cattle
prices jumped $2-5 cwt. in trading this past week. In the south cattle sold
for $150-152 while Nebraska cattle brought up to $153.50. Dressed prices
were mostly at $240 -- also $2-4 higher. Packer inventories had been
depleting as they were able to buy cattle lower but the need to replenish
found inadequate supplies and forced prices higher.
The corn market made a major move higher following and
preceding a USDA report. Wet weather and a deteriorating crop condition sent
corn up 75 cents on the CME board. The deterioration in this year's crop has
ramifications for the ethanol industry, pork producers and chicken
producers. Most immediate of concern is to those feeding cattle or selling
replacement cattle. Adjustments will be necessary for all producers of meat
products and soy related products also move sharply higher threatening
protein sources for feed rations.
Beef prices were lower to close a holiday shortened week.
Processing margins are large at the current level of live and box prices. Box prices were steady to mixed at mid
week. The slaughter rate for this June will be remembered as the smallest in
modern history. Choice cuts were at $250 and select at $248. The choice/select spread is currently $2.
The choice/select spread has narrowed far beyond normal seasonal patterns.
The toll of increased grain prices on feeder prices will
be significant. The spread between fed prices and feeder prices had been
unusually wide and now is expected to narrow. This will come in the second
six months of the year when feeder supplies will be increasing and prices
are expected to decline. Prices next week are expected to be sharply lower
for all replacement cattle.
The crop ratings sank and the crop conditions now are in
poor shape when compared to the past 10 years due to wet fields. Tuesday's
USDA report confirmed damage caused by flooded fields in the corn belt. It
is rare to see grain market jump skyward from too much rain but traders are
now looking back to years in the 1990s with similar conditions. The corn
basis in Guymon, Oklahoma is currently quoted at +$.60 over the July
contract. Corn is
now pricing into rations at $8.50 cwt. in the Oklahoma Panhandle.
JBS PURCHASES HOG FACILITIES FROM CARGILL
JBS, the Brazilian meat giant, purchase all of the hog
production and processing facilities of Cargill for $1.45 billion. This is
the first move into live hog production for JBS and will require justice
department approval before being final.
THE TOTAL MEAT SUPPLY SITUATION
The cash prices for fed cattle last week crossed the graph
line with last year and fell below last year's prices for the first time
this year. Last year, the last week of June found fed prices near $155 vs.
this year's $148. Some traders and cattle owners are looking at the fed
supplies this year, indicated by a steer and heifer slaughter that is 50,000
head per week under last year, and wondering how we can be selling cattle
lower than prior year.
In rounded numbers the answer is fairly straight forward.
The average daily slaughter of cattle has declined 6% from last year. The
slaughter weights are heavier than last year and there are more steers in
the mix due to holding back heifers for rebuilding. These two factors helps
to reduce the tonnage loss to approximately 2.5%. In the meantime, hog
slaughter is up 6% over prior year and chicken production is up 4% over last
year. Food service and grocery stores are making money selling plentiful
pork and chicken.
Supporting the large supplies of total meat has been beef
imports that are dramatically higher than last year assisted by a strong
dollar. All of the countries sending beef to the U.S. have ramped up
business and volumes are running 25-50% over last year. The imported beef
has struck a blow to the grind market that led the summer rally in cattle
prices last summer. Also aiding in the decline of fed prices this year has
been the drop credits. Hide prices are 25% under last year and all drop
credits are taking $50/head from the packer's bottom line.
The analysis early this year that caused the first large
decline in cattle futures cited large competing meat supplies, large imports
and heavy weights as ammunition for a fed market in steep decline. Since
those early forecasts, futures prices for summer and fall have stayed in a
fairly tight trading range hovering around $150 while fed prices have fallen
from $170 to $148. But where do we go from here.
Last year cattle prices for fed cattle continued to rise
into the fourth of July and beyond taking prices into the $160s. This year
packers have pared the June daily slaughter level to the lowest in modern
history in an attempt to regain some bargaining leverage over cattle owners
who have been able to hold on to those high prices in spite of box prices
that seem to decline with every slaughter week that exceeds 550,000 cattle.
More cattle will be available in July but the pipeline of beef is short
bought and retailers have the ability to push move beef if the economic
incentives are there.
FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE OUT
Readers have been sending notes regarding breakeven
projections. One commenter ask how we could use 80 cents for a cost of gain
when everyone knows that is too low. Another ask why we are using such a
high cost of gain number. The two emails illustrate the difficulty of
providing one benchmark for all regions of the country. Currently a typical
bases in the corn belt might be $1 under the futures and alternatively a
corn basis in Hereford, Texas might be $1 over the futures. The northern feeders
have much cheaper grain and more expensive feeder cattle. A more meaningful
report would include one breakeven and close out for each major region. It
also is difficult maintaining the tables when both fed and replacement
prices are changing in $5-10 cwt. price blocks.
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.
|750 # Feeder Steer||1,630.88||217.45
|Cost of Gain 600 pounds||500.35||0.83
|Estimated Interest(Prime + 1%)||38.56||
|Net Profit / Loss||-75.99||-5.63
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.
|750 # Feeder Steer OKC 150 days ago||1,800.00||240.00
|Cost of Gain 600 pounds||527.81||0.88
|Estimated Interest(Prime + 1%)||36.05||
|Current Texas Panhandle Cash||1,997.73||147.98
|Net Profit / Loss||-366.13||-27.12
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