APRIL 5, 2020  

 

CATTLE MARKET REPORT AND ANALYSIS

  

 

PLAINS MARKET TALK

 

              

Cash Cattle

 

As the coronavirus crosses the nation, it was inevitable that the outbreak would touch someone at the beef plants. Beef plants are regarded as essential industries and the nation's committment to keeping the food supply chain open and functioning is critical. The Mayor of Grand Island, Nebraska announced the positive test for COVID-19 on 10 employees of the JBS beef plant. This follows reports of isolated cases at other plants in the U.S. and Canada.

 

The JBS plant manager said the plant will not close and employees will not be required to work, but the plant will stay open with strict guidelines for protection from the spread of the virus. Obviously, this will slow down the chain speed and require close supervision of the workforce to assure no sick employees are on duty.

 

The identification of COVID-19 personel was discovered on Thursday and likely created the end of the rally in the futures on Friday sending the April contract down the permissible limit. The implications of diminished plant processing capabilities is well known in the industry after the Tyson fire.

 

Protecting the nation's food supply is a top priority of the government and emergency powers give government officials wide latitude to dealing with crisis problems and the meat processing plants in the country will be a target of their focus. All of the beef plants will be taking temperatures, dispensing PPE [protectective personal equipment such as gloves, masks, and other gear], and changing work station positions as well as increased testing.

 

Assuring open and operating beef plants may require screening all employees with COVID-19 testing. This would assure a safe workplace. Testing kits could quickly be deployed to each plant. The testing would also need to include family members with stay at home orders. USDA is expected to take an active role both in plant supervision, testing, and as a communication channel to assure consumers of a steady supply of food. Steps might include:

  • Testing all plant employees.

  • Saturday and Sunday shifts.

  • Tolling arrangements with cattle feeders to pass through costs and margins to be shared.

 

Cash trade was one of the smallest volumes in recent years. This occurred at a time when the only reported cash trade was $114 in Nebraska. On Wednesday the online fed cattle exchange sold a few pens of cattle at $113 followed by trade in the country mostly at $112. Dressed sales were mainly at $180. These prices are $7-10 lower than last week.

 

Cattle Futures. Cattle futures fell the daily limit with rumors of slaughter slowdowns and COVID positive cases at some plants.

 

The Comprehensive Fed Cattle Weekly Report offers the most current information on the current status of fed cattle being harvested. The report is published each Tuesday and includes the previous week's change in carcass weights and quality grading. The latest report shows carcass weights down 5# at 867# which remains 25# over last year. Quality grade grading was also flat at 83%.  

 

Forward Cattle Contracts:  The price decline in the futures market has slowed forward contracting of fed cattle. Only a trickle of cattle are sold for forward delivery.

 

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. Box prices continued to lose ground. Slaughter this past week dropped to 626,000 head. The loss of food service business and distributors combined with supermarkets that have replenished their shelves has slowed demand for beef. The choice/select spread was $14.

 

Gauging beef demand moving forward will be a work in progress. Food banks are moving care packages to the needy. The jobless will be receiving money soon but how all of these forces impact meat demand is unknown.

 

Beef Feature Activity Index. Retailers are finding a calming and more routine level of traffic in stores across the country. Eating at home will become more routine with regular trips to the market for many Americans during this health crisis. Meat counters were watching the shelves for cut selections of consumers as they plan eat at home menus.

 

Cutout Values as of Friday, April 3, 2020
Choice CutoutChoice Price Change
230.44Down $2.20
Select CutoutSelect Price Change
215.84Down $6.28
Choice/Select Spread
14.60
 

 

Replacement markets

 

Much of the replacement market moved into shutdown mode. Buyers backed away from extending bids on replacement cattle. Sellers backed away from bids that backed up dollars every phone call. Some owners of replacement cattle were deciding to feed their cattle rather than sell but many financing packages were put on hold as lenders attempt to shore up lost equity.

 

Breakeven projections for many owners were discouraging with the balance of this year's futures prices at such low levels. Current feeding margins are deep in the red even at the lower feeder cattle prices. Liquidity in the futures market is at a all time low and opportunities for profit anywhere in the system seemingly non-existent.

 

Oklahoma City. Receipts were larger and prices were sharply lower.

 

Feeder Cattle Futures. Feeder futures were limit down. This decline was at the new expanded limit.

 

Feeder Cattle Cash Index. The index is tracking the moves down in cash prices.   

 

Forward cattle contracting. Forward selling has slowed or stopped as buyers and sellers evaluate market conditions.        

 

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

 

Grain Futures. Corn prices were modestly higher in late week trading. Ethanol demand is waning as many plants switch to providing DDGs instead of gasoline additives. Planting time is near and the expected increase in corn acres may suffer from low price forecasts. The corn basis is weakening at 60 over the May board in Guymon, Oklahoma. Corn is now pricing into ration at $7.50 cwt. in the Oklahoma Panhandle.

 

 

TOLLING IN A TIME OF CRISIS

 

The natural role of buyer and seller is advesarial. Buyer wants to buy cheaper and seller wants to sell higher. The transfer of ownership in the livestock business is no exception and negotiating the transfer price is a major allocation of time on both sides and a frequent source of contention among the parties.

 

There may be times that call for cooperation and a combined mutual effort between the parties and this may be one of those times. The coronavirus crisis is a time for pulling together to solve the multitude of problems encountered everyday that threaten human health and commerce. No problem is more critical to daily life than an assured food supply and beef is a major player in this space.

 

It was inevitable that some employees at a meat plant would be identified as COVID-19 positive and that is now a reality. The implications are far from being known but the immediate concerns of both cattle feeders and meat packers is keeping the plants open and keeping the supply of beef flowing through the beef pipeline.

 

One option is to sell the April futures and deliver the cattle and let someone else worry about where they are slaughtered. Some have chosen that route but there are no longs so the price of the April futures is discounted $25 under the cash prices and we are in the delivery month.

 

These extra-ordinary circumstances call for an emergency arrangement between cattle feeders and meat packers called a tolling arrangement. Tolling has been around for decades and is a sharing of the margin, after deducting the cost and marketing expenses of the beef sales, between the parties. The base price would be the price this past week protected for the month of April. The base price would be the start of calculation that would include processing and delivery expense of the beef and the net would be split between the parties.

 

The alternative is chaos. The futures and the cash are supposed to converge. The usual approach is the packers will drop bids towards the futures level until hedged feeders agree to unwind their hedge. The problem is there are no longs to close the gap and there is fear in the marketplace that plants may close. There will be an outcry if feeders are ask to take a $300/head loss under today's cash for the cattle to sell in April. Some packers have already protected April pricing at $110 for some producers.

 

 

 

CATTLE REPORT LIBRARY

 

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 BEEF BLOCKCHAIN

 

THE BEEF BLOCKCHAIN SLIDE SHOW

 

The Case for National ID for Cattle

 

Reforming the Futures Contract and Cash Trading of Cattle

 

 

NOTE TO READERS

 

Sections of the newsletter are redesigned with hyperlinks to the appropriate source pages. The hyperlinks are in light blue within the report.

 

 

 

 

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 Steer817.13108.95
Cost of Gain 600 pounds439.370.73
Estimated Interest(Prime + 1%)21.18 
Current Breakeven1,273.3594.32
Current Futures1,193.8188.43
Net Profit / Loss-79.54-5.89

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 ago1,065.00142.00
Cost of Gain 600 pounds485.210.81
Estimated Interest(Prime + 1%)22.84 
Resulting Breakeven1,573.05116.52
Current Texas Panhandle Cash1,614.33119.58
Net Profit / Loss41.283.06

 

 

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