PLAINS MARKET TALK
While the panic selling may have slowed, the futures
continued the downward spiral. The past two week has taken
fed prices down $25 cwt. ending last week at $120 and lower in the north. These
are sea change numbers and will have lasting impacts on the beef industry.
Usually price declines of this magnitude are limited to event driven news
releases -- mad cow, "pink slime", etc., but this freefall seems to be
fundamental and internally driven. There is simply excessive beef supplies
for this particular day and time.
The most immediate impact of the market decline is on each
cattle owners inventory. The value of those inventories are falling far
beyond normal expected market fluctuations. The result is mostly taking
place behind the scene of the public arena in calls between lenders and
principals discuss margins and deficiencies. Also discussed in most of those
conversations will be the plan moving forward and it is those plans that
will directly impact the entire industry. For some operations purchases will
be curtailed until borrowing bases are restored to acceptable levels. For
others, positions in the futures market will be established to limit damage
from additional declines. For all, except the fully protected and hedged
operators, the pain will be serious and debilitating.
Box prices opened the week lower. Unfortunately, the timing is not
ideal for pushing beef specials on the marketplace as we lead up to turkey
season. However, these new price levels of various cuts should attract new buying
interest both domestically and foreign. The select cutout moved under $200. The choice cut out fell
$2 to $204 and
select to $199 leaving the spread at $5.
The news from the feeder markets was lower again but many
auctions reported fewer feeder offerings with prices another $5 lower at
Oklahoma City. The leading indicator of feeder offerings numbers is the
crush of feeder prices, grain pricing levels and deferred fed cattle futures
prices. If there were large amounts of feeder cattle offered into the
marketplace then feeding margins would widen but there is little evidence of
widening margins and feeder buyers are mostly limited to packer related
feedlots. A 750# feeder steer was selling for $180 in the south.
The largest price pressures has been in the south and
southeast where small auction markets are seeing prices plummet with each
subsequent sale. The stocker trade watched as calf prices fell with each
day establishing new lows for the past couple of years. In auction barns
across the south, 400 -500# weight calves now are crashing towards $1.75 not
much different from a yearling offering. This of course does not
assure a profit to buyers of those animals but they have $500 per head less
risk on the downside. For the first time in several years breeders are
finding threats to their profitability with the new calf prices.
Corn futures moved higher with all but the spot December
contract moved back over $4. The corn basis in Guymon, Oklahoma is currently quoted at
+$.40 over the September contract. Corn is now pricing into rations at $7.50
cwt. in the Oklahoma Panhandle.
WHERE DO WE GO FROM HERE
The rally Friday was sparked by several market analysts
who asserted that the last two weeks had cleaned up many of the heavy cattle
contributing to the current market glut and crashing prices. Unfortunately,
it is unlikely this market crash is going to end as a small blimp on the
charts followed by a rally back to the prices of a month ago. Carcass
weights are still a problem and the latest report from two weeks ago showed
additional gains of almost 5#s.
The current market crisis is not a supply crisis. Cattle
supplies are quite low from a historical perspective. The current situation
reflects a more serious problem with beef demand. The beef cutout has fallen
to levels of three years ago but there are several important differences.
For the past three weeks, the slaughter has ranged from 570-576,000 cattle.
Three years ago the slaughter was over 700,000 per week. Beef production
currently is around 480 million pounds a week compared to 580 million pounds
three years ago. These dramatic differences illustrate the current problem
with beef demand. We are currently producing 17% less beef than 3 years ago
and selling it for the same price. Imagine in today's environment if we were
slaughtering 700,000 cattle, we would need to give the beef away -- a
condition some believe we are doing now.
What next for fed prices? Friday's move
higher in the futures market will likely not be contradicted by the coming
week's market action. The good news is the market rout will probably be
stopped next week but the bad news is why. Excessive numbers are rarely
cleaned up with a premium based futures market. December live cattle
contract is currently selling $8 premium to the October board. Cattle
feeders will temporarily and to the best extent possible, delay October
marketing numbers into the December time frame. They will attempt to avoid
moving cattle into overweight territory but enough cattle will be held back
to shore up the current glut.
Whats next for feeder cattle? In some
ways cattle owners, with feeder cattle, have more flexibility than feedlot
owners. They can and will hold cattle longer on pasture hoping for some
price relief. This will continue to push the pool of cattle outside feedlots
larger and eventually erode prices further as feeding capacities aligns with
supplies outside yards. Some feedyards aligned with processing companies
will continue buying but the majority will sit on their hands until feeder
Whats next for retail beef? The retail
beef trade is the slowest to react to quickly changing markets. Many of
their purchases are forward bought and reacting to sharp moves downward
require planning at the store level and therefore a slower reaction to
falling prices. Food service companies require menu changes and they don't
like to move quickly into a market and out of the market. Export beef also
is slow to react. Exporters need to plan for shipping time frames and also
must always consider other global beef movements and prices.
The industry must recognize a downtrending market that is
unlikely to see prices rally. Acceptance of this inevitability is a
necessary component for getting to work to restore lost demand caused by
years of short supplies and high prices and lost marketshare.
FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE
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
|750 # Feeder Steer||1,366.50||182.20
|Cost of Gain 600 pounds||482.09||0.80
|Estimated Interest(Prime + 1%)||32.93||
|Net Profit / Loss||-46.16||-3.42
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.
|750 # Feeder Steer OKC 150 days ago||1,665.00||222.00
|Cost of Gain 600 pounds||512.89||0.85
|Estimated Interest(Prime + 1%)||33.56||
|Current Texas Panhandle Cash||1,621.89||120.14
|Net Profit / Loss||-589.56||-43.67
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