September 19, 2019                                







Cash Cattle.


Packers first picked a handful of cattle at steady prices then raised bids one to two dollars picking off additional cattle at $101 in the south and $162 dressed in the north. Numbers were not sufficient for this week's needs and additional purchases are likely this week. One friend did some quick calculations and reported that at $1 cwt. gain per week, he would reach breakeven Christmas week. 


Pockets of beef producers are emerging to protest packer profits and producer losses. Packers and Stockyards have been asked to investigate collusion and price fixing but there will be little evidence to support the charge. Built up resentments are natural given the large processing margins at the beef producers expense. One group is calling for individuals to petition President Trump for help using a twitter account. Unfortunately, the solution to the current division of profits on cattle moving through the beef pipeline is more slaughter capacity.


Carcass weights moved sharply higher in the weekly comprehensive report. Traders will watch for signs the industry is backing up cattle and the size of this week's slaughter will be important to maintaining a current status. Packers will try to reach close to a 650,000 head target this week. Packers need no encouragement to keep plants humming, record margins will assure they will process all they can. The challenge is labor and aging facilities.


Cattle Futures. Futures prices were mixed on the close with losses in the front end. Traders will await more signals from the cash markets before proceeding with long positions.



The Comprehensive Fed Cattle Weekly Report offers the most current carcass weight information. Steers and heifers are grouped together. The latest report shows carcass weights up 8# at 870# -- moving above last year. This number will be closely watched as the industry adjusts to the loss of one plant.


Forward Cattle Contracts: As one might expect, there was little forward contracting during the distress in the market prices.


Weekly graphs on the Comprehensive Weekly Fed Cattle Report break down the categories of trade for the week according to 1) formula cattle; 2) negotiated live; 3) negotiated dressed; 4) and forward contracts. Some cattle included in the formula category are week to week negotiated grids and not committed cattle to one plant. Other cattle designated as formula are "over the tops".


The Cutout. The composite cut out weakened at mid week. The retailers are well aware of packer margins and are pushing for participation in those margins. The choice/select spread widened to $26.


Beef Feature Activity Index. Domestic interest will improve moving towards the winter holidays and in anticipation of higher prices later in this year. It is always useful to keep in mind the role of competing meats and alternative proteins when evaluating beef's position in the marketplace. Chicken production is ramping up and with the drop in grain prices will provide a cheap alternative for consumers.  


Cutout Values as of Thursday, September 19, 2019
Choice CutoutChoice Price Change
218.17Down $0.07
Select CutoutSelect Price Change
192.16Up $0.19
Choice/Select Spread


Replacement markets


The pace of offerings of stocker and feeder cattle is beginning to increase and will continue during the next two months -- October and November. Yearling cattle will be plentiful and heavy. The base price that has been in decline is reversing and recent sales moved higher on all replacement cattle. Weights are also posting gains from last year.


Marketing of yearlings are expected to experience bunching this fall as many operators have held inventory rather than sell into a marketplace with prices well under last year. All indications are the size of the national herd has peaked and depending on economic conditions of the operators in beef production, the next move in the cycle may be liquidation. Cow slaughter continues above last year.


Moisture conditions are spotty with some areas finding rain and others lacking. Some wheat is being planted and moderating temperatures are in the forecast. Preconditioning calves puts animal health on the front burner. The wide spread between nighttime lows and daytimes highs makes for troubling heath issues.


Oklahoma City. Choosing a marketing week for stocker and feeder cattle is always a throw of the dice but rarely to the markets from week to week take $10 swings -- both ways. The OKC Monday market regained the $5-10 loss of last week by gaining $5-10 this week. Yearling steers weighing in the high 700s last week sold in the low $130 and this week in the high $130s.  


Feeder Cattle Futures. Feeder contracts were strong on the back end.    


Feeder Cattle Cash Index. The index reflects the interplay between cash and futures. Cash for now is well over futures. This will encourage many buyers to wait until next month for purchases.


Forward cattle contracting. Feedlots are attempting to purchase replacement cattle discount to the futures and having little luck.       


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


Grain Futures. Corn prices were higher. The cloud hanging over the corn market is ending stocks. With lagging export demand, even a smaller harvest will not dent the increasing stocks from poor export demand. The corn basis is currently at 60 over the September board in Guymon, Oklahoma. Corn is now pricing into rations at $7.50 cwt. in the Oklahoma Panhandle.




                        U.S. CATTLE ON FEED ESTIMATES
                   IN YARDS WITH MORE THAN 1,000 CAPACITY
                                                  AVERAGE            RANGE
                                   ACTUAL       OF ESTIMATES     OF ESTIMATES
CATTLE ON FEED      September                           99.4       98.5-100.0
PLACED DURING          August                           94.3        88.9-97.8
MARKETED DURING        August                           98.3        97.6-98.8


The release Friday of the cattle on feed is expected to report the first year on year decline since 2016. This would follow four months of lower placement year on year.





Bankers always brag on customers who are hedged in times like this when cattle are posting $200-300 losses. To a lender, sophisticated risk management translates into protection for the bank’s pledged cattle inventory.  Banks are always more generous with lending percentages and interest rates on hedged inventory as they should be.


Protection on cattle inventories varies from operation to operation and individual to individual sometimes with encouragement from lenders. Some operations are managed with fully hedged positions on cattle, grain, and interest rates. Even a fully hedged operation still has a weather risk and a basis risk. Other operations hedge nothing and simply rely on efficient operations and price averaging to survive. Many operators are somewhere in between and try to pick the right time to seek protection for certain aspects of the risk of owning cattle.


The large feeding companies are mostly hedge operations and increasingly are dominated by investment firms rather than traditional livestock operators. This past week Green Plains, an ethanol company, announced the sale of half interest in its feeding operations to a group of investment companies. Five Rivers, the largest feeding firm, is also owned by a consortium of investment companies. The processing companies have mostly exited the cattle feeding business holding on to the current gold standard for profit.


Risk management depends on good strong futures products and there is a question mark on whether the current contracts deliver that requirement. The live cattle delivery contract was designed in the 1960s and, except for the animal specifications, has not undergone revision since. Long speculators are hesitant to engage in a product that might deliver to them, cattle they don’t want, at a location they can’t determine. The hedgers believe the contract construction favors the feeders because only the shorts can deliver, and the longs can’t call in cattle.


The feeder cattle contract is cash settled but the formula for cash settlement is imprecise and relies on unconfirmed transactions in the cash markets. Many of the cattle included from the public auction markets would be considered by many to be outside commercial purchasing requirements. The flaws in the construction has proved to be an obstacle to widespread use of the contract by commercial interests [the large feeding firms] and the result is a lack of liquidity in an important risk management tool.


Hedge funds and investment funds generally enter markets with reliable returns that can be quantified. Some are looking for arbitrages that allowing risk management tools to assure small but dependable margins without high risk. Not to be overlooked is the largest risk feeding cattle -- running an efficient business. No amount of risk management can overcome the lack of this basic requirement.      






Below are links to articles published in the Cattle Report pertaining to industry change. Two important changes are on the table for progress -- supply chain management and animal ID. Both applications will transform and disrupt the industry.






The Case for National ID for Cattle


Reforming the Futures Contract and Cash Trading of Cattle





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 Steer1,051.73140.23
Cost of Gain 600 pounds432.540.72
Estimated Interest(Prime + 1%)40.63 
Current Breakeven1,517.43112.40
Current Futures1,565.06115.93
Net Profit / Loss47.623.53


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 ago1,050.00140.00
Cost of Gain 600 pounds510.700.85
Estimated Interest(Prime + 1%)34.87 
Resulting Breakeven1,595.57118.19
Current Texas Panhandle Cash1,342.9899.48
Net Profit / Loss-252.59-18.71



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