September 5, 2015  

                    

    CATTLE MARKET REPORT AND ANALYSIS

 

  

PLAINS MARKET TALK

 

The deterioration in cash prices continued on Friday with live sales in the south at $143 and northern sales in Nebraska $142-143 live and mostly $222 dressed. Volumes in Texas and Kansas were small but in the north volumes were larger and many cattle destined for slaughter in Kansas. These prices are $2-4 lower than last week. The very tight supplies of cattle in Texas and Kansas demonstrated the power of regional differences caused by supply balances with packing plant needs in each region. Rumors circulated of one basis trade at $5 over futures in Kansas for the balance of this year.

 

Packer margins have widened. Lower cash prices helped by discounts on heavy carcasses have led to the widest margins and largest profits of the year in the beef plants. Those who comment on the cash markets and call them broken miss the point. The cash markets are probably operating more efficiently and offer more diversified options for selling cattle than ever before. The simply are not reported in a form that is transparent to the marketplace. Sellers know the market and and are selling at premiums of $2-5 above reported prices. Of course the risk for the premium based sellers is no reportable cash market to attach a premium.

 

It might be easy to blame the recent fall in cattle futures and cash prices on the stock market and there is some truth to the correlation between stock prices and commodity prices. While commodities and beef prices are related to the health of the global economy, they are not a function of the daily moves in stock prices. The causes of the fall in cattle prices are more fundamental -- a decline in demand for beef, overfed cattle in the nation's feedyards, and the value of the dollar and its impact on imports and exports of beef. The current cash price for cattle at $143 is the low for 2015 despite cattle numbers 7% under last year when cash prices were $162 for this same week.

 

Box prices were weaker on the close and for the week. Last week's slaughter rates moved higher to 556,000 with packers capitalizing on profitable plants. Larger slaughter will begin to absorb some of the cattle that seemed to be backing up at the feedyard level. Larger slaughter levels will not be possible without some improvement in demand for beef. Traders will be watching this weekend's clearance of beef to see how restocking orders proceed. The cutout for choice was at $240 with select at $228. The choice/select spread is currently $12.

 

The procurement notion of buying cattle and waiting for a bailout from the futures has been modus operandi for much of the industry. Historically, producers watch markets go up and down and can find a spot during the course of the production cycle when futures reach a profitable level for the cattle owner. This is not one of those times. Producers across many sectors are left holding the bag as futures prices continue on a steady decline.

 

Late week bids from feedyards were dollars below early week bids and auction prices also fell several dollars in late week trading on stocker and feeder cattle. Much like the feedlot situation, replacement cattle are backed up and will be bunched this fall. Also mirroring the feedlots, in addition to more numbers, the weights are heavy on pasture aided by ideal grazing conditions this year. USDA informed us July 1st of 700,000 more available feeder cattle outside feedyards and those replacement cattle have not yet come to market given the July and August placement numbers. It is more likely the government underestimated those numbers rather than overestimated them. Feeder futures are staircasing prices lower in the deferred contracts.

 

Calf prices fell in most auction markets across the country as stocker operators reevaluate the risk proposition for winter grazing. Some auctions reported late week declines of more than $10 and next week additional losses are expected. Wheat fields are being planted across the southern plains and rains are in the forecast for next week.

 

Corn futures moved lower. This has been one bright spot in cattle feeding and has led to cheaper than expected grain cost. The crop will be nearing completion in the next few weeks across the plains and generally is thought to be a good crop with conditions more uneven than last year. The corn basis in Guymon, Oklahoma is currently quoted at +$.50 over the September contract. Corn is now pricing into rations at $7.20 cwt. in the Oklahoma Panhandle.

 

DEMAND FOR BEEF AND THE GRIND

 

Demand for beef is not determinable in a meaningful manner from a carcass price variation. Instead it is necessary to break down beef demand according to an analysis of institutional and consumer demand for various beef cuts and offal products. At the top of the list in importance is the grind or ground beef products that make up everyday fast food or restaurant options as well as meat counter offerings at the grocery store.

Five years ago a consumer visiting a burger shop such as McDonalds, Wendy’s or Burger King would have their choice of many different beef hamburgers all appealingly displayed on the wall with appetizing photographs.  Today the consumer is provided with many new offerings of which beef burgers are just one with new features of chicken sandwiches,  pulled pork, turkey burgers and so on….. This change occurred for two reasons: 1) Hamburger meat became in short supply; 2) The price of hamburger meat skyrocketed. The historic burger shop was struggling to profit selling beef burgers so they switched to meat options that were cheaper and provided more margin. They also made the buns smaller so as to accommodate smaller portions.

Meanwhile during the last year, conditions changed in the marketplace. The dollar moved sharply higher making imported beef much more desirable. Imports particularly of ground beef jumped multiples of prior year volumes. Demand was smaller because restaurants needed less beef because of the new menu changes and alternative meat offerings. This has caused ground beef in the current environment to fall to levels not seen since the “pink slime” scare of 2012.

The ground beef market is big and can at times support cuts like chucks and rounds. The weakness in the ground beef has led to price declines in those cuts while loins and ribs have continued to maintain their price level because of the smaller numbers of cattle slaughtered. Import trigger levels may slow imports the balance of the year and that could be supportive to the domestic cutout. Also the possibility of weakening in the dollar could provide relief from the flood of cheap imported beef.

The beef industry will need to win back market share as numbers of cattle expand and slaughter levels rise. Winning back market share will happen when fast food markets discover they can offer more beef options and build in a good margins when they do. Supermarkets can also find generous margins as they buy beef products dollars lower and can lower retail prices to attract consumers and also make money doing it. Beef features long missing from advertising campaigns can once again be prominently displayed.

 

 

 

 

 

FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES

 

Readers have been sending notes regarding breakeven projections. One commenter ask how we could use 80 cents for a cost of gain when everyone knows that is too low. Another ask why we are using such a high cost of gain number. The two emails illustrate the difficulty of providing one benchmark for all regions of the country. Currently a typical bases in the corn belt might be $1 under the futures and alternatively a corn basis in Hereford, Texas might be $1 over the futures. The northern feeders have much cheaper grain and more expensive feeder cattle. A more meaningful report would include one breakeven and close out for each major region. It also is difficult maintaining the tables when both fed and replacement prices are changing in $5-10 cwt. price blocks.

 

 

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 Steer1,508.63201.15
Cost of Gain 600 pounds485.420.81
Estimated Interest(Prime + 1%)35.89 
Current Breakeven2,025.15150.01
Current Futures1,927.53142.78
Net Profit / Loss-97.62-7.23

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 ago1,665.00222.00
Cost of Gain 600 pounds531.470.89
Estimated Interest(Prime + 1%)33.72 
Resulting Breakeven2,230.19165.20
Current Texas Panhandle Cash1,970.19145.94
Net Profit / Loss-260.00-19.26

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