September 29, 2014  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

  

 

Certainty is so often overrated.

 

The hand writing was on the wall. Carcass weights were increasing indicating some lack of currentness in the fed cattle offerings. Box beef prices were lackluster suffering declines of $25-35 cwt. or 12% over the past few weeks. Box prices were down 10 of the last 12 days. Packer margins were deteriorating and dipping into the red. Into this backdrop comes trading this past week with all analysts forecasting a $1-2 decline in fed prices. Problem was things never turn out as expected.

 

All this past week the October contract had been building a bottom holding at $155 and refusing to move lower despite heavy selling pressure. Friday morning the contract broke out to the top side -- eventually moving limit up. Traders sense that bargaining power is moving back in the cattle feeders camp with shortened supplies looming soon in the future. Cattle owners followed the futures by raising asking prices. Packers resisted raising bids fighting negative margins leaving the entire trade suspended as of Friday afternoon.

 

Today buyers and sellers will sort out the implications of the end of the week surprising bull market. First order of business will be to profile the activity over the weekend looking for clues to price action in the cash market. Early this morning there were only a few reports of dressed sales at $248 or $3 higher than last week and live sales at $159 in Nebraska with Kansas bids at $2-3 over the October board. Traders also will keep an eye on the reaction of futures today as well as assessing the magnitude of this week's show list.

 

Box prices leveled out towards week's end. Stabilizing box prices is regulated by slaughter volumes. Seasonally those slaughter numbers should begin to rise with improving fall demand for beef. Packer margins are seasonal and it is not unusual for a decline in processing margins to occur in the fourth quarter of the year. Choice box prices were quoted at $239 with select at $225 and the spread at $14.

 

The fall run of calves is dominating the receipts at most auctions while most yearling cattle were previously sold and remain in short supply. Cheap corn is a strong underpinning to demand for replacement cattle. Some farmers in the midwest will opt for a few cattle rather than selling their grain into a weak corn market. Recent rains stimulated interest in lighter cattle. In the southern plains, a 750# steer brought $230.

 

Small stories on yield are infiltrating the trade with stories of extremely high yields in all regions of the country. Corn prices are soft as the harvest news comes in and the market finds few people willing to take the long side of the corn market. Harvest pressures are impacting both the cash price and the basis negatively. This year should be a record crop. Corn basis Guymon, Oklahoma is currently quoted at +$.90 and declining. Corn is now pricing into rations at $7.50 in the Oklahoma Panhandle.

 

 

 

TRADING HOURS ON THE CME

 

A couple months ago the CME released an announcement informing members the exchange was considering changing the trading hours for cattle and requesting comments. The comment period is probably closed but traders might expect some changes in the near future as the exchange tries to align trading volumes to the hours of the day.

 

Since the cattle contracts have mainly converted to an electronic format, there have been times when overnight trading was active and Asian traders took large positions in cattle or hogs. Asian commercial interests also have good reason to trade cattle futures in order to offset risks associated with the raw product that will be setting the price for beef they intend to purchase in the United States.

 

Recently, this Asian activity, both speculative and commercial, has dried up. The impact on the live cattle contract has been to leave much of the overnight trading largely deficient in volume and when larger orders are executed the bid/ask spreads are wide and fills poor leading some traders to abandon overnight trading. This leaves legitimate traders stuck with the predators who will fill your order but at a horrible price.

 

Tennessee Williams, the American playwright, once said what he liked about New York City was the fact that you were always able to get a drink -- no matter what time of night. The same can be said for the availability of overnight trading in the cattle futures, it is some comfort to some people to open a screen at any time and see quotes.

 

In the end, nothing much is accomplished by opening the book of orders and seeing bids to buy and offers to sell of 1s and 2s scattered over $2 cwt.. It may give some people a power charge to consummate trades on 20 contracts in the feeder board and move the market $1 cwt.. It is probably best for a long term viable contract to shorten the hours. More important to the industry would be the objective of moving the live cattle contract to a dressed contract for a Choice YG 3 carcass.

 

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 Steer1,728.60230.48
Cost of Gain 600 pounds456.220.76
Estimated Interest(Prime + 1%)40.14 
Current Breakeven2,220.46164.48
Current Futures2,198.21162.83
Net Profit / Loss-22.25-1.65

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 ago1,350.00180.00
Cost of Gain 600 pounds548.900.91
Estimated Interest(Prime + 1%)28.37 
Resulting Breakeven1,927.27142.76
Current Texas Panhandle Cash2,146.50159.00
Net Profit / Loss219.2316.24

 

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