FEBRUARY 13, 2015  

                    

    CATTLE MARKET REPORT AND ANALYSIS

  

PLAINS MARKET TALK

 

 

Cattle prices ended on a weak note uncoupling from a rebound in stock and oil prices. Cattle owners continued to sell cattle at lower prices. For the week, Kansas and Texas traded cattle from $132-134. Iowa posted sales from $128-130 with dressed sales at $$205-206. Nebraska traded most cattle from $130-132 with dressed sales mostly at $206. The only positive sign of confidence in the market was the fact packers were willing to add additional inventory at the bottom end of the trading range.

 

Futures prices are struggling to understand which is the real cash market for cattle. The live cattle contract is based on a live cash price. Traders look to sales prices of muddy cattle in the north ranging from $126-130 then see reports in the southern plains of $134 then will find, after the fact, next week, that many cattle brought back live prices of $135-140 under various types of formula arrangements. 

 

February has never been a beef eating month and storms and transportation disruptions have not helped. The market is not suffering from too many cattle but too little demand. Breaking the cutout into the primal cuts offers some explanation of the troubled beef market. The middle meats are finding good demand and prices for the ribs are actually higher than prior year. The drag is the end meats and the grind. Sales of those cuts are finding stiff competition from cheap pork and chicken. A warm up in the weather can turn around interest in those beef cuts.

 

Box prices have been unevenly mixed all week. They haven't fallen like the cash markets and sporadically have shown signs of support but weekly losses are near $4. Plants will be returning to a more normalized slaughter schedule. A warm up in much of the nation was in the forecast and restocking meat counters and warm weather might presage improvement in beef demand. The choice cutout was quoted $1 lower at $216 with select at $212 leaving the spread at $4. 

 

Feedlots will reassess purchasing strategies over the weekend after another volatile week sending feeder prices lower once again. Losses in early week trading were compounded by late week weakness in futures and fed cattle prices. Feeder cattle prices were $3-5 lower in Oklahoma City as a crashing futures market took its toll on buying interest. Calf prices were more resilient as stocker operators prepare inventories for spring and summer grazing. Condition and health on high risk cattle associated with sale barn purchases seasonally improves this time of year as calves lose fat and are harder and some calves are weaned prior to sale. Average yearling steers were selling in the high $140 on the southern plains.

 

Corn futures continue to move lower moving towards the lower end of a $3.60-70 trading range. There will be little reason to change pricing until new information develops of the spring plantings. This is barring a major development in the South American crops. The corn basis in Guymon, Oklahoma is currently quoted at +$.40 over the March contract. Corn is now pricing into rations at just above $7.25 cwt. in the Oklahoma Panhandle.

 

HUMAN NATURE IN FUTURES TRADING

 

The impulse to sell when the market is crashing and buy when it is soaring is as old as human nature itself. Warren Buffett warns us to buy when others want to sell and sell when others want to buy. But this is contrary to human nature. No matter the rationale, the information and emotion sending the market in one direction tends to overwhelm our most rational instincts and carries us along with the crowd. Getting caught up in the volatility of the cattle futures has been unavoidable for those attempting to hold on to margins by protecting risk through the futures market.

 

Anyone who has been trading in the futures market for more than a few weeks is aware of the sinking feeling in your stomach when an attempt to hedge a new position finds the market moving away from you. In more normal times, the market would move a few points then realign and move back, but these are not normal times. Instead of finding prices moving a few ticks one direction then a few ticks in the other direction offering traders a chance to enter and establish a position, these sessions in the cattle futures are frequently characterized by extreme moves in both directions.

 

Patience is usually a virtue and overcoming emotion in a trading environment is generally advised and the tools for overcoming emotion are rooted in careful rational thought. The problem is accountability. Generally, in any hedged cattle operation, one person is responsible for managing the futures position and held accountable. In the extremely volatile environment of the past few months, positions either don’t get placed or are placed at the wrong price and/or at the wrong time. The risk manager then become the scapegoat.

Prominent in the mind’s eye is the moment of indecision that resulted in a lost opportunity for hedging, and the attendant financial repercussions. Everyone can remember when “I should of, or I could of” and initiating a position frequently causes an over-reaction by chasing the moving target with the resulting fill far out of range from the target price. That is life, but the memory sticks and is dominant over the lapsed memory of the hedge where the market moved in your favor with an fill much improved over the target.

Helpful in the risk management assignment is a well-functioning marketplace. Well-functioning markets bring liquidity, transparency and confidence of the participants in the structure of the underlying product the futures contract is referencing. Those elements are missing in the cattle futures setting up the risk manager as the fall guy in the business of protecting risk.

 

 

 

 

 

 

FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES

 

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. 

 

 

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.

INPUTSTOTAL$$CWT
750 # Feeder Steer1,128.38150.45
Cost of Gain 600 pounds445.380.74
Estimated Interest(Prime + 1%)30.12 
Current Breakeven1,598.40118.40
Current Futures1,567.76116.13
Net Profit / Loss-30.64-2.27

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 ago1,575.00210.00
Cost of Gain 600 pounds524.850.87
Estimated Interest(Prime + 1%)33.98 
Resulting Breakeven2,133.83158.06
Current Texas Panhandle Cash1,834.65135.90
Net Profit / Loss-299.18-22.16

Click here to "Check out the markets "
Click Here to send your comments