PLAINS MARKET TALK
The beef plants are struggling to line up a kill and make
a profit. The feedlots are deep in red ink and attempting to ratchet the
cash market higher. When the stressors of the marketplace weigh on your
business then all parties are looking for relief and sometime the relief
comes in the form or creative transactions designed to help your bottom
Packers are pushing cash prices to fill the kill but in
ways designed to not find their way to the mandatory price report. The
object is to price over half their slaughter lined up in formulas. Multiple
ways are popular to accomplish this objective. "Over the top" bids moved
from $1.50 over to $2 over in Kansas and Nebraska. 3000 head sold for $150
in Nebraska yesterday but may not find their way to the price reporting
service. Cattle sold in Kansas last week at $148 but only a few found their
way into the mandatory price report. Cattle are traded and priced off the
futures. Sadly after all this pricing, only 5000 cattle traded in Kansas
last week leaving weekly pricing for 200,000 cattle based on the 5000 which
we all assume is the bottom of the barrel.
Futures prices are hearing rumors of all the off the
balance sheet trading and responding. Live cattle touched limit up and
feeders gained $3 cwt. No one has ever questioned the short supplies of fed
cattle or feeders to this point, but sustaining the rally will require box
prices to respond.
Beef prices seemed to have found some stability however it
took a rollback in the slaughter rates to get there. Some good news that retailers are
planning beef features for August may allow enough demand improvement to
start working off what appears to be a backlog in the feedlots. The cutout
was steady at $234 for choice cuts and select at $229. The
choice/select spread is currently $5. Choice cuts are now $20 under prior
Futures prices for feeder cattle guided the markets
higher. Replacement cattle offerings are beginning to transition from light
offerings caused by abundant available forage across the plains, to larger
offerings. Stocker operators are not unaware of the dangers of the fall
market burdened by bunched supplies of feeders. Prices gained $2-4 in
trading at the Oklahoma City auction.
Calf runs are increasing across the south and southeast.
Wary buyers are attempting to deal with health issues and discounts to
weaned offerings of large spreads are common. Breeders are finding the cost
to wean a calf on site is being well rewarded by today's marketplace. Larger
ranchers who can sell weaned calves in load lots are making weaning a
necessary part of their marketing plan.
Corn seems to have found some support and is moving higher
after a big decline. Corn has fallen 50 cents a bushel in as short time
but some traders believe the market has oversold. The corn basis in Guymon, Oklahoma is
currently quoted at +$.60 over the September contract. Corn is now
pricing into rations at $7.80 cwt. in the Oklahoma Panhandle.
August will be the beginning of a discovery process for
many sectors of the beef industry. It is rare to find all segments of the
beef industry losing money at the same time. A more traditional pattern
would witness one sector operating at a profit at the expense of another
sector but instead the processor, feeder, and stocker operator, are all
fighting red ink.
The transition from short supplies of cattle to more
abundant offerings will create some chaos because there exists no valid
models for a rapid fire ramped up rebuilding of cattle numbers that we are
likely to see in the coming months. The start will be larger supplies of
feeder cattle to come this fall and this will begin to chart the course for
larger supplies of beef though the next few years.
Forecasting how prices will react is a big job and any one
believing they have this figured out will be at risk of failure. Obviously,
if beef barely holds steady on a 532,000 slaughter week, there remains a lot
of work to restore beef demand. Probing the elasticity of the demand curve
will not be easy. Retailers will need to toy with various pricing and
featuring models in supermarkets to find the right path to profitable sales.
Processors will be watching the fluctuations in the dollar to find signs the
beef will be an attractive value for export -- something that holds the key
to rebuilding demand.
Feedlots suffering for several years from overcapacity
will be looking to see the negative crush of feeder cost, grain cost and
deferred futures moving into a correction mode. Feeder cattle supplies are
expected increase eventually overwhelming a feeding capacity diminished by
closed and abandoned facilities. This will create a sea change in feeding
margins that have been negative by over $100 for the past month.
Forecasting how the herd build up will impact prices will
be a big challenge. If 2014 was a banner year for the unhedged feeder, 2015
will be a quick reminder that what goes up can come down as quickly and as
unexpectedly. Those doubting the markets ability to go any higher in 2014
suffered the consequences just as those who believe the market can't fall to
the level of the deferred contracts this year also might find
FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE
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
|750 # Feeder Steer||1,606.73||214.23
|Cost of Gain 600 pounds||478.83||0.80
|Estimated Interest(Prime + 1%)||37.85||
|Net Profit / Loss||-103.81||-7.69
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||1,590.00||212.00
|Cost of Gain 600 pounds||544.20||0.91
|Estimated Interest(Prime + 1%)||32.52||
|Current Texas Panhandle Cash||1,957.37||144.99
|Net Profit / Loss||-209.36||-15.51
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