April 29, 2017. 



BOC Loan





Cash Cattle. Last week surprised even sellers who held tough in the market as futures took off on a rampage. Conditions were perfect for the surprisingly strong market of last week. Weekly volumes in the cash market have been large but many of those purchases each week were for for forward delivery periods leaving packers in need of cattle for the spot weekly slaughter needs. Offerings were moderate in size but needs were greater and aided by skyrocketing futures, the cash market jumped ending the week at $140 live in the north and $138 live in the south. Dressed sales were mainly $217-219. Most surprising were the dressed sales in the north at $218-219 for late May delivery.


The news of continuing declines in carcass weights, good beef demand, and cattle owners becoming emboldened with their position as strong sellers of cattle, served as a backdrop for a runaway fed market. Packers are left scrambling to put together kills and meet obligation for forward sold beef.


Cattle Futures. Futures have played catch up all year to a strong cash market. The recent jump has not only yanked the spot and next month higher but also has lifted the entire cattle futures market for the deferred months in the live contract and all feeder contract months.  


Carcass weights are released each Thursday and are a closely watched barometer indicating the position of cattle feeders in the nation's feedlots. The last report released for the week of April 15th, had steer carcass weights falling 4# to 848# remaining 30# under prior year. Heifers were 25# under last year. 


Forward Cattle Contracts: One again packers were active last week purchasing cattle for May and June. Packers bought 18,000 for May and 11,000 for June at prices not reported by mandatory price reporting but instead posted as PAR sales under basis contracts. Word of mouth reports and rumors show these sales at $125-131. USDA refuses to correct their erroneous report that has resulted in confusion and misinformation for the producers.


The weekly breakdown of fed cattle moving to the beef processing plants is as follows. 1) formulas 55%; 2) negotiated 20% [both live and flat dressed]; 3) forward contracts 25%. Some of the formula arrangements are week to week negotiated prices and not committed cattle to one plant.


The Cutout. Box prices moved higher on Friday as packers struggle with margins and will look to retailers for higher prices next week. Packers have forward sold a lot of beef and this week's large slaughter of 624,000 head was partially caused by the need to fill those orders. This was the largest weekly slaughter of the year. Improving processing margins can come from only two sources, improving demand for beef, a normal spring event when supermarkets feature more beef specials, or a paring of slaughter rates.  





Choice CutoutChoice Price Change
221.78Up $2.63
Select CutoutSelect Price Change
207.68Up $1.00









Replacement markets


The unseasonable warm temperatures of February and March has resulted in the winter grazing fields maturing sooner than most years. Cattle normally targeted for late May delivery are now being forced off the fields but if they are unsold, they might suffer in spite of higher prices. Most feedyards are full. This accompanied by skyrocketing futures is pressuring the basis. Many feedyards are standing aside. 


Oklahoma City. Prices were quoted higher on all classes of cattle.


The type of light weight offerings is somewhat changed in the late spring as new crop calves become a larger part of the cattle sold. Bawling calves means health risk and heath risk means more medicine cost and death loss. The thin hard bodies of cattle coming out of the winter is quickly replaced with fleshier offerings of calves filling up on green forage.


Feeder futures. Feeder futures continued higher as the complex moves to a new trading level.  


Feeder Cattle Cash Index. A unique feature of this year's markets is the inverse relationship between live cattle futures and feeder cattle contracts. Live cattle have traded most of the year at large discounts to the cash market. Currently, the feeder contracts, by contrast, are trading premium by $10 on the May board to the cash feeder cattle as represented by the feeder cattle index.   


Forward cattle contracting. The only activity in forward contracts was for summer periods. Prices were mostly $2 discount to the board for summer on 800# steers delivered to the Texas Panhandle. 


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


Corn futures. Corn prices flattened out in late week trading. Corn basis quotes are 30 cents over May in Guymon, Oklahoma. Corn is now pricing into rations at $7.00 cwt. in the Oklahoma Panhandle.




The solution to the reporting problem exists and can be quickly implemented. It is called a block chain and takes each transaction for cattle either fed, feeder or stocker and creates a block transaction, confirmed by buyer and seller, then linked to a chain in time order. Transactions would be posted in a linear time line and would include the delivery period, by week for the first 30 days then by two weeks, up to 60 days then by month. Industry participants could view the blockchain but not individual transactions or names. They could review transactions by region, by delivery period, or nationally. The block chain would serve as a cash settlement tool for the CME live cattle contract that is struggling. Industry leaders say it is a good idea but needs to be studied and will take years to implement.


A group of Aussie wheat farmers didn't agree. They were unable to find prices offered by grain terminals in different geographic locations. They were forced to simple accept the local bid. Furthermore, once they accepted bids for their wheat, the settlement and clearing of the transaction took 45 days. In six months they put in place a blockchain that now allows them to view bids from locations all over their area and has decreased the settlement and payment to two business days.





The pages of market commentary over last weekend and the beginning of last week were full of definitive warnings to beef producers that the "Tops are In" for this year. Statistics examining the cattle placement matrix and the attendant marketing expectations all pointed the same direction. Futures prices confirmed their opinion and packers were joyful in supporting this analysis. Then we all were reminded of the CARDINAL RULE OF COMMODITY TRADING: WHEN IT IS OBVIOUS TO EVERYONE, IT HAS GOT TO BE WRONG!


A brief survey of operators in the live sector of beef production reveals a simple fact. Many operators are hedged and the margin calls of the past week were overwhelming. Experienced hands in the cattle business have witnessed "irrational exuberance" on more than one occasion. The managed futures funds jumping on the cattle contract from locations like Darien, Connecticut are riding a winning horse today but they are staging a bet on prices next summer and beyond.


We are constantly reminded of the decline in carcass weights and the additional 15,000 of cattle each week required to produce the same tonnage as last year. This is true but placement numbers remain burdensome for summer and fall marketings. Some analysts, only a couple short weeks ago, were questioning whether current slaughter capacities could accommodate the number of cattle necessary to harvest this summer and fall.


The balance between fed supplies and processing needs has highlighted another pressing problem -- convergence in the futures markets. The expiration of the April contract followed similar problems with the close of earlier contracts. Futures traded at large and severely discounted prices until the last few days of trading then shot higher to converge with cash. Cash settlement would end these volatile expirations and make the convergence of the spot contracts more orderly. As the April contract expires, June is left as the spot contract and is currently trading almost $20 under cash. As a further insult to the construction of the contract, some cattle traded at $219 dressed or the equivalent of $139 live for the end of May.


Modeling cattle prices has long been a puzzle to expert traders. Corn production is a fixed amount of bushels and the usage and balance around the world can be quantified. Beef production is dynamic and constantly in flux as producers change plans either because of weather or changing marketing periods based of hitting the best market. This has a direct and contributory impact on price and frequently when producers act in unison, creates the opposite impact from what is expected. The small placements in the springtime create the impression the fall markets should be high and futures confirm this information. Producers then hold over summer marketings to hit the high fall market but only to find a mirage as the fall high disappears.


The revised thinking in market letters this week were now talking about new levels of support for price through the summer. Some now see prices holding in the $130s through the summer months. Experienced hands know the seduction of rosy forecasts and the regret that comes from getting carried away by what others think -- especially those with no money at risk. Come October, remembering back to last spring and pricing opportunities overlooked, can be part of continuing education.




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







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. 




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 Steer1,060.35141.38
Cost of Gain 600 pounds425.180.71
Estimated Interest(Prime + 1%)29.68 
Current Breakeven1,509.96111.85
Current Futures1,591.65117.90
Net Profit / Loss81.696.05


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 ago915.00122.00
Cost of Gain 600 pounds448.410.75
Estimated Interest(Prime + 1%)22.24 
Resulting Breakeven1,385.65102.64
Current Texas Panhandle Cash1,765.53130.78
Net Profit / Loss379.8828.14



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