July 28, 2014  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

 

THE MARKETS

  

 

Live cattle futures open well above $160 this morning making some believe the gap between futures and cash is closing. Another view is the gap is not closing with asking prices on many cattle moving to $170 or $5 higher than the bulk of last week's pricing. Show list are likely to increase but will be moving higher from a quite low number.

 

The cash trade this past week represented price as a rationing mechanism for a scarce resource. The cattle feeder is in a similar position to a publicly held corporation enjoying short term beneficial profits at the expense of long term stability and sustainability. There will come a time soon when retailer marketers of beef will be forced to raise prices significantly to the consumer both in stores and restaurants and there will be some resistance. Offsetting this inevitably fact, is the future supplies of beef will only get smaller at least for another year.

 

Cash prices were on a rampage last week and show little signs of abating. Purchases starting last Wednesday picking off the weakest sellers then worked down the line to the toughest sellers culminating on Friday with trades reaching $166 and purchases extending out three weeks at $165. The price range for the week was $161-$166 and up to $260 in the beef. Futures prices were drug along.

 

Box prices turned sharply higher and posted major gains for the week. The retailers have been short bought. They joined packers in expressing the view than larger supplies were going to be on offer later this summer -- a view that is now discredited by many. Both packers and retailers are scrambling to catch up on inventory. Quality grades across the nation were running several percent higher than last year. Choice box prices were quoted at $256 with select at $253. The choice/select spread is $3.

 

The monthly cattle on feed report was mildly bullish but will presage a July report that can reliably be expected to be wildly bullish. Wildly bullish can't really be the proper descriptor when everyone expects something. It will forecast some major problems with beef supplies later this year and early next.

 

Number of Cattle on Feed, Placements, Marketings, and Other Disappearance on
1,000+ Capacity Feedlots - United States: July 1, 2013 and 2014
-----------------------------------------------------------------------------------
                                        :          Number           :  Percent of 
                  Item                  :---------------------------:             
                                        :    2013     :    2014     :previous year
-----------------------------------------------------------------------------------
                                        :   ---- 1,000 head ----        percent   
                                        :                                         
On feed June 1 .........................:       10,767        10,594           98     
Placed on feed during June .............:    1,551         1,455           94     
Fed cattle marketed during June ........:    1,880         1,847           98     
Other disappearance during June ........:       63            75          119     
On feed July 1 .........................:         10,375        10,127           98     
-----------------------------------------------------------------------------------

The grass is green currently and the offerings of cattle are currently scarce and feedyard occupancies will decline as feedlots sell but do not replace. There will be some increased placement number this fall but it is doubtful any placement months will exceed prior year. Some of this summers decline in placements into feedyards has been middle weight cattle sent to grass.

                       

The replacement market is headed back up possibly reaching the previous high at some point. The feeder index has dropped for the week but is expected to post a recovery ahead. Cash prices for replacement cattle closed last week $4-8 cwt. higher. Heifer placements on feed have declined rapidly as more breeders are held for calf production. While the herd can not increase with the speed of the other meats, rebuilding is moving forward at full force motivated by the oldest and most effective stimulus -- price. A 750 # steer was selling for $217 in the southern plains.

 

Corn price continue the downward spiral. Corn prices now have fallen almost $1.50 a bushel in a month. Corn prices have suffered on the board but the basis has been unusually strong and feedyards in the southern plains has seen the premium basis negate much of the fall in corn prices. This is expected to change in the fall and fall basis for corn will bring to the forefront the full discounted price to cattle on feed in the southern plains.

 

The current price pushes many corn producers into losses on this year's crop. Ideal growing conditions and good crop development has corn on track for a bountiful crop and the normal summer crop scare is looming more remote as each day passes. Three quarters of the crop is rated good to excellent. Corn is offered at $1.20 over the September contract basis Guymon Oklahoma. Corn is now pricing into rations at $8.75 on the southern plains.

 

 

HOW HIGH IS HIGH

 

It is always dangerous and scary when the high pressure salesman starts to believe his own sales pitch. The cash prices for cattle have surprised and amazed many market participants. Record after record has been broken. A step back from the day to day or week to week might be useful in order to understand the significance and impact of this monumental price rise.

 

The July cattle inventory report confirmed cattle numbers at a 60 year low. While this has been occurring, the world is coming to rely more and more on meats in the diet and third world countries, frequently resigned to grain based diets, are turning to meats including beef. Domestically our beef eaters are eating less beef not because they are turning away from beef but simply because there is less beef.

 

A drop in the grain prices has historically and traditionally signaled an increase in placements of cattle on feed. Corn has fallen $1.50 a bushel to well under half the price of a short time back. This has not resulted in an increased number of cattle placed on feed because there is an insufficient supply of cattle to bring on feed.  In the same way beef consumption has declined because there is less beef, placements have declined because we have been pulling forward on cattle and the remainder of cattle outside of feedyards is dwindling.

 

Against this backdrop are skeptical cattle feeders who have questioned the sustainability of the price rise all the way up. Each new peak was thought to be IT only to have prices consolidate and head back up again - each time pushing into new untested price territory. Everyone knows that one of these days will be an IT day and the market will hit the top and the new direction will be down. No one knows when that will be. The chartist and the technical traders are only a failed sideshow at this point.

 

An increasing number of players are coming to believe these prices are here to stay and may get higher. The cattle feeders and stocker operators that have played safe and hedged their inventory are sick of margin calls created by higher futures prices. Some of those operations are choosing to abandon the hedge programs and turn bullish. Therein lies the risk to the industry. If you know a $160 feeder steer can lose money, think about how much money a $260 feeder steer could lose.

 

 

  

 

FEEDER MATRIX

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 Steer1,655.25220.70
Cost of Gain 600 pounds507.850.85
Estimated Interest(Prime + 1%)39.14 
Current Breakeven2,197.23162.76
Current Futures2,130.98157.85
Net Profit / Loss-66.25-4.91

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 ago1,282.50171.00
Cost of Gain 600 pounds538.420.90
Estimated Interest(Prime + 1%)27.10 
Resulting Breakeven1,848.02136.89
Current Texas Panhandle Cash2,187.00162.00
Net Profit / Loss338.9825.11

 

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