PLAINS MARKET TALK
Smaller show lists and more active packer activity changed
the direction on cattle futures and reinvigorated bullish sellers who are
confident of achieving higher prices this week. Initial bids of $157 were
quickly refused pushing packers to raise bids to $159 where only a few
cattle traded. Asking prices ranged from $162 to $10 over the April board.
While short sellers may get the last laugh, for the time being the bulls
have control of the market.
Wednesday's rally put the chart and technical traders to
work. Disparate theories of price patterns were expressed with the majority
citing the $154-155 as an important resistance point if and when breached
the market might move sharply higher. It does appear likely that the
current premiums of cash over futures may continue into the summer with the
June board lagging the cash market by $15 cwt..
Beef gets lumped with all meats while the realities of
cattle supplies on hand and placed on feed paint a different story. Cattle
placements on feed this year and ending last, are down sharply from prior
year assuring smaller supplies of fed cattle through the summer. The show lists
fell this week as weather takes a toll on cattle performance. Cold and wet
pens has hampered some winter gains and cattle are carrying some mud to the
Box prices showed buying support last week and continuing
this week. The slaughter rate should
increase moving into spring with larger slaughter numbers and better beef
Box prices were firm for select and weak for choice at $248.50 with select
at $247.50 and the spread at $1.
Feeder futures moved up the permissible limit of $4.50.
This was and is a constant reminder to cattle feeders that volatility in
replacement cattle will be something that must be built into any procurement
model and what you do today may be totally out of the money tomorrow or may
be a great buy. Any movement in feeder prices is fragile and may soon
disappear. This has the feeding companies living hand to mouth with
purchases. Snow and cold weather slowed auction sales left many supplies of
cattle being pushed forward for marketing purposes. A 750# feeder steer was selling for $205 on the
Corn prices moved sideways continuing the trend of the
past few weeks. Corn acre
estimated to be smaller this spring than last year. The corn
basis in Guymon, Oklahoma is currently quoted at +$.60 over the May
contract. Corn is
now pricing into rations at $8.00 cwt. in the Oklahoma Panhandle.
ARE FUTURES BROKEN
One can look at any given contract of live and feeder
futures and know one thing -- the prices last quoted on the exchange will be
wrong. Each transaction making up trading sessions is a guess or a bet of
future prices and 99.9% of those guesses will be in the final analysis
determined to be wrong. This pertains to longs and shorts.
The CME as the operator of the exchange where those
futures are traded has no obligation to provide satisfactory prices to
hedgers or to provide a profit to speculators. They do have a responsibility
to provide a fair marketplace and to assure the rules are followed and the
contract specifications are relevant to the industry and product described.
The February contract expired Friday. Recently, the
contract traded down to $150 and market watchers complained those prices
were out of touch with the fundamentals and the contract was broken. In the
final analysis the contract's expiration, the price level corrected to cash
prices. With the exception of a handful of contracts trading in the last
minutes, most of the last two day saw the prices above $160 or near the
April now assumes the role of spot month and again is
trading just over $150 after having traded as low as $145 last week.
Macro-investors have been betting the entire commodity complex was due for a
decline and cattle are part of the basket in those bets. The money
controlled by hedge funds can easily overwhelm the normal money flow in
cattle contracts. The result and the disconnect has been between the cash
and the futures giving the cash the largest premiums to futures in years --
The implications for the industry is for change in
marketing tactics. More cattle feeders are covering hedged positions and
selling cattle forward in the cash market. Other unhedged feeders are
forward selling the cattle and buying the futures. Both strategies are
designed to capture the spread between current cash and current spot
It is always easy and convenient to comment on the fact
that those shorting the futures lack any knowledge of the market
fundamentals. This is wrongheaded. There will be more pork and chicken in
future months and beef will struggle to keep its price premium in the
supermarket. No one is able to properly measure and predict that
supply/demand price point. But always if market watchers believe the futures
contracts are mispriced, they can place their bet. Those operating in the
cash markets for cattle, feeder and fed, are betting every day with their
purchases that the premium basis will continue.
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||1,518.60||202.48
|Cost of Gain 600 pounds||482.99||0.80
|Estimated Interest(Prime + 1%)||36.07||
|Net Profit / Loss||-85.80||-6.36
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||1,725.00||230.00
|Cost of Gain 600 pounds||530.97||0.88
|Estimated Interest(Prime + 1%)||34.77||
|Current Texas Panhandle Cash||2,143.80||158.80
|Net Profit / Loss||-146.94||-10.88
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