October 24, 2020







Cash Cattle


Packers added very little inventory on Friday leaving them somewhat short bought into the coming week. Live prices were mainly at $105 in the north and $106 in the south with pockets of $103-104 in Iowa. Flat dressed prices ranged from $163-166. Iowa has moved from a market leader to laggard. Sellers seem to have tired of taking lower prices but some hedged sellers will always cave in when the basis is positive.


For the first time this season, weather should enter the matrix of inputs. A storm system is moving down from the north and may play a role in feedyard performance that otherwise has been excellent. The open fall has influenced optimum gains for most feedyards in the plains and unfortunately to extra beef tonnage.


The bearish placement number for September [+6%] will be mitigated by preliminary indications that October placements will fall behind last year. October numbers overwhelm other months as the largest placement month of the year. Placement news will begin to change as we move into 2021 excepting March and April when chaos from the coronavirus was felt across the market. Moreover, heavy placements of cattle in Nebraska in September occurred as corn prices were pointed directionally towards $3 bushel -- certainly encouraging farmers to feed the corn rather than sell. This has reversed now with corn well over $4 bushel.


The basis is all important in decision making for cattle owners. Whether the sellers of fed cattle are hedged or unhedged, the futures price represents a benchmark and when cash is well over the futures, sellers are inclined to move more cattle. A prolonged period of positive basis will push more cattle to market and reduce tonnage as feedlots pull forward inventory to sell.


Cattle Futures. Futures prices may be finding support. The attempt to find a bottom and consolidation point must be a result of new buyers entering the market on the long side. seem to be consolidating after a major move downward. All of the symtoms of a dysfunctional futures marketplace are in place with a lack of market makers, speculators and commercial interests willing to correct abberant price moves.


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 8# higher at 901# which remains 28# over last year. The extra tonnage continues as a burden on the market and will continue through the fall. Quality grade grading was flat at 81.7% remaining seasonally high. This was the first week of average carcass weights above 900#.


Forward Cattle Contracts:  The level of futures prices relative to breakevens is a guidepost in establishing volumes of forward sales at even given point in time. Sellers have been adding to forward purchases as prices provide a profitable level to exit. Volumes in all months have increased into 2021. Most recent transactions have improved the basis from mostly $-1 to now $+1 to the appropriate month except May that carries a larger $4 premium transitioning into summer.  It is noteworthy that some operators who have forward sold cattle failed to also protect a position in corn futures.


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 were firming at week's end. Retailer interest may view recent declines as a low point for entering the market before holiday demand kicks into the market. Last week's slaughter number was 654,000 -- a 11,000 increase from last year. The choice/select spread is widening, as quality grading slips, to $18.


Cow slaughter continues to be large indicating liquidation of some herds from drought in the southwest. Most of the increase in cow slaughter is from the beef herd while dairy cows are running under last year as dairy margins improve.




Choice CutoutChoice Price Change
207.49Down $1.37
Select CutoutSelect Price Change
191.40Up $0.32





Beef Feature Activity Index. Retailers will turn their focus to holiday features. The holidays usually see increases in the prices of the middle meats. Beef features are currently the top seller of the meats in many markets around the country. Retailers are currently willing to take more out front risk on owning inventory at current price levels.



Replacement markets


Higher grain prices, increasing drought areas of the country, and crashing futures are troubling the stability of the cash markets in replacement cattle. The USDA corn stocks report followed by a reduction in corn acres has moved the corn above $4 bringing with it a higher basis in the southern plains. Additionally, continuing drought in the southwest is causing some liquidation and premature selling of cattle. Winter grazing areas now are facing the possibility of fewer grazing opportunities. Buyers will be cautious proceeding with purchases in the coming weeks.


Placement levels over prior years has slowed during the past few weeks. Cattle owners are not yet willing to accept materially lower prices even though some have few options. Stocker operators with calves on hand for winter grazing are looking at losses to forward sell cattle for spring or hedge a drastically lower board price. Buying more calves to average down is sometimes an option but this requires having a spot to graze the new purchases.


Oklahoma City. For the second week in a row, all classes of cattle suffered a major decline in price. Dry weather and high feed costs threaten the viability of many grazing operations this year. Prices were $5-8 lower. Differentiation between weaned and unweaned calves spread the pricing at the widest level of the year.


Feeder Cattle Futures. Future posted additional losses. The surge in grain prices, drought inspired liquidation and losses in fed cattle prices have all contributed to a rout in feeder pricing.


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


Forward cattle contracting. The expanding drought pushes cattle movements towards the front end with some operations have little choice about marketing periods when the cattle have no feed in front of them. Feedlots with much uncertainty about feed costs, are becoming reluctant to be active in the forward markets. Stocker operators who do have winter grazing are not willing to forward sell any cattle at today's prices.


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


Grain Futures. Corn futures were higher in late week trading. Old man winter is entering the picture while harvest is winding down. Contrary to most thoughts, the basis is increasing with the corn price. Basis levels for OND corn 70-80 over the December board in Guymon, Oklahoma. Corn is now pricing into ration at $8.70 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        October           104            103.2      102.7-103.9
PLACED DURING       September           106            102.4       98.9-106.5
MARKETED DURING     September           106            105.8      104.9-106.7
Placements once again disappointed the folks looking for positive information in the monthly cattle on feed report. 
Placements were 4% over pre-releases guesses. 



Cattle futures provide a useful tool for all cattle owners -- hedged or not. They reflect minute by minute the sentiment of all traders regarding the future price of cattle. Those sentiments are almost always wrong but represent the best thinking at any given point in time. They also provide a measuring post for lenders who are constantly assessing the value of inventory on which they are lending.


The past 10 days has signaled a major change in the future view of cattle prices for all contract months. The roughly $10 cwt., or close to a 10% drop in prices, came out of nowhere and remains unexplained to most industry players today. The change in open interest reveals the movement was not new sellers entering the market but established long positions exiting the futures market. This observation is confirmed by regular reports indicating a reduction in the open interest.


Some of the large feeding companies, running fully hedged operations, believe the delivery contract serves their interests. They believe creating a downside bias in the contracts benefits their basis when closing positions. This is a short term view. Continual support of this view will eventually harm the viability of the live cattle contract and the futures as a risk transfer tool. Any successful futures contract must have liquidity to survive and thrive.


The construction of any successful contract must satisfy the requirement of fairness to both sides of a trade. The contract must never favor longs or shorts but always provide a trading vehicle that treats each side equally, attracting traders from all corners of the trading world. Currently too many speculators and outsiders are unwilling to enter into a commodity contract that might end in their having a few loads of cattle delivered to them in Clovis, NM.. Moreover, the delivery of cattle to antiquated stockyards creates stress and unnecessary handling for the cattle. This is a contract designed for a different day and time.


Commodity contracts always attract traders from both the fundamental and technical side of price speculation. Technical traders concern themselves with moving averages, Bollinger Bands, Stochastic indicators, and Fibonacci Charts. They are constantly looking for price patterns and many theories are in place today impacting price of all commodities daily. Fundamental traders attempt interpret market data to parse supply/demand issues that affect daily pricing of fed cattle and beef.


A successful commodity contract needs all traders to be willing to participate in order to create the type liquidity necessary for broad market participation. Should technical traders take prices beyond fundamental price levels, the fundamental traders will enter the market attempting to correct what they perceive as a pricing error. The flaws in the live cattle contract prevent traders from entering the market to correct pricing errors because of unfair construction of the contract and the threat of delivery.    






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 Steer1,001.48133.53
Cost of Gain 600 pounds526.000.88
Estimated Interest(Prime + 1%)25.84 
Current Breakeven1,548.13114.68
Current Futures1,475.28109.28
Net Profit / Loss-72.85-5.40


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 ago900.00120.00
Cost of Gain 600 pounds486.990.81
Estimated Interest(Prime + 1%)19.97 
Resulting Breakeven1,406.96104.22
Current Texas Panhandle Cash1,454.76107.76
Net Profit / Loss47.803.54



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