February 27, 2016. 



BOC Loan





Cash Cattle. Watching the posted prices on live cattle futures is setting the stage for a rapid decline in cash prices. The expiring Feb is followed by a $10 decline into April live cattle followed by another $10 decline into the June contract followed by another $5 decline into the August contract. It is not unusual seasonally for prices to decline into the summer and placement patterns were heavy following October of last year.


All is not gloom and doom. Beef demand is good and we are slaughtering 10% more cattle currently than last year. The discount in the forward months is keeping the feedyards current as they market cattle earlier. Some hedged sellers are noting the advantage of marketing now rather than adding another 100# and taking a significant discount in price.


The majority of the sales last week were mainly at $125. Dressed sales were mainly at $195-197. Live sales were $5 higher and dressed $5-7 higher. Cattle owners will test this week to see if additional gains are in the market and to confirm last week's packer interest in buying forward in March. 


Cattle Futures. The rally this past week was mainly limited to the expiring February contract. The deferred months refused to budge and fell in trading on Friday. As February expires, many see little reason for April to decline further and some will risk leaving a protected state by removing hedges.


Carcass weights are released each Thursday and will be a closely watched barometer indicating the position of cattle feeders in the nation's feedlots. The last report released for the week of February 11th, had steer carcass weights falling by 8# to 879# remaining well under prior year.  This also was seen as supportive of near term prices.


Forward Cattle Contracts: There is little activity in forward contracts. Packers are interested in forwards but sellers lack interest due to the recent decline. Sales are reported by USDA each Monday and below are those for the largest volumes of beef cattle. Basis trades were almost non-existent last week.


MARCH 2000 +$3 Apr
APRIL 2000 +$3 Apr
MAY 2200 +$3 Jun
JUN 800 +$2 Jun



The weekly breakdown of fed cattle moving to the beef processing plants is as follows. 1) formulas 55%; 2) negotiated 20% [both live and flat dressed]; 3) forward contracts 25%. Some of the formula arrangements are week to week negotiated prices and not committed cattle to one plant.


The Cutout. Box prices shot continued higher as packers raise asking prices faced with sharply higher input costs. The slaughter rose to 572,000 last week from 524,000 last year. The improvements in box prices this week will go a long ways towards offsetting the rise in live prices. Warmer weather is the feature across much of the nation and this might create additional retail interest in beef in the upcoming weeks.   


The cattle inventory report released the end of January showed more heifers held for breeding. Nonetheless, heifers are also increasing in feedyard placement. The role of increasing heifer placements is important in assessing the stages of the cattle cycles. Current placements would seem to indicate the expansion buildup of the national herd is continuing but slowing. 




Choice CutoutChoice Price Change
198.96Up $2.77
Select CutoutSelect Price Change
195.48Up $2.65










Replacement markets


March is expected to bring on board larger offerings of cattle. Anticipating this development, futures prices fell losing $3 in late week trading. Stocker operators who have carefully watched the auction barn prices mainly in Oklahoma City have passed on country bids deciding instead to take a risk at the auction. As these increasing supplies of cattle hit the market in March, feedlots that are filling fast will be lowering bids for replacements.


The main change in prices will be the basis levels for feeder cattle that were reaching historically wide levels in February. 800# cattle were selling with $3 premiums delivered to the Texas Panhandle and this level provided many proforma breakevens negative by $50-75/head. Those premiums are expected to disappear and more cattle are offered off winter wheat fields in March.


Oklahoma City. Both yearling classes and calves were steady Monday in trading at the OKC auction.


Mid week sale at OKC--West  followed the lead of OKC and traded mostly steady.


Feeder futures. The feeder futures fell in expectation of the USDA cattle on feed report and larger supplies of cattle to move in the March-May period.                 


Feeder Cattle Cash Index. The index has stopped falling and is holding above current spot futures prices.        


Forward cattle contracting. The feeding companies that have been raising basises for current offerings will reverse course and reduce those basis trades for cattle delivering through the summer.  


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


Corn futures. Corn and wheat moved lower in late week trading. Traders are awaiting the first early forecast of corn acreage that is expected to be down by 1-2 million acres. Corn basis quotes are 25 cents over December in Guymon, Oklahoma. Corn is now pricing into rations at $7.25 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       February           101            100.6       99.8-102.5
PLACED DURING         January           111            110.6      106.8-118.2
MARKETED DURING       January           110            110.2      106.3-110.0



The Monthly USDA report came in right on target with the average of pre-release guesses.




Cash cattle have moved sharply higher and some believe the run may not be over. Box prices are moving higher every day and show lists have been smaller. Most importantly, carcass weights have been dropping leaving smaller beef tonnage to sell. The February spot futures contract will expire in a few days. February prices have been reluctant to acknowledge the rise in cash prices and have been dragged or yanked higher to match cash prices. The deferred contracts have refused to acknowledge the advances in cash prices. April closed last week $10 cwt. under the last week's cash prices. It is set to be the spot month next week.


The most obvious beneficiary of this price action is the hedged feeder. This level in the basis leaves the hedged feeder with large premiums rarely experienced in the marketplace. But things are never so simple. Some commercial hedgers run a very disciplined program, buying replacement cattle, selling deferred futures in the live cattle, buying corn contracts and covering those positions as they mature. Other hedgers pick their time to hedge and pick their time to exit the hedge. A cattle owner with March/April cattle to sell and wanting to hedge is not finding the opportunity to hedge particularly attractive.


In other commodity markets, the current situation in cattle would present a perfect opportunity for the entrance of the speculative long. A speculative long would attempt to capture the $10 spread between April futures and today's cash prices. The trouble in today's environment, the speculative long is afraid to enter a spot contract month when one might expect to have unwanted cattle delivered to the long in Clovis, New Mexico or the many of the other designated delivery points across the nation. This condition denies the sometimes hedger the market to protect a price.


A different view would be the market is expected to crash between now and April. Everyone knows and acknowledges that placements past October of last year moved sharply higher with many placement months reporting double digit increases. Picking the time when to expect a wall of cattle is difficult for the most expert market readers. The discount in the April contract has many cattle owners moving cattle forward and this condition is confirmed with the declining carcass weights that now are 12 pounds under last year. It is further confirmed by packers willingness to extend purchases of cattle well into March as current prices.


A healthy marketplace for derivative contracts provides opportunity for both longs and shorts to develop theories on prices and execute positions to capture expected price movements. Today's live cattle contract with a delivery component discourages entry and robs the marketplace of the needed liquidity on which every vibrant market depends.






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 Steer928.88123.85
Cost of Gain 600 pounds443.880.74
Estimated Interest(Prime + 1%)26.88 
Current Breakeven1,394.16103.27
Current Futures1,369.98101.48
Net Profit / Loss-24.18-1.79


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 ago1,035.00138.00
Cost of Gain 600 pounds446.750.74
Estimated Interest(Prime + 1%)24.56 
Resulting Breakeven1,506.31111.58
Current Texas Panhandle Cash1,613.66119.53
Net Profit / Loss107.347.95



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