PLAINS MARKET TALK
A winter storm interfered with trading with some feedyards
unwilling to accept steady money and the market at a standstill. Snow, rain,
and ice crossed the plains with an almost certain impediment to cattle
performance. The storm also impacted this week's holiday shortened slaughter
by further reducing it as a couple of plants on the southern plains
cancelled the A shift. The small volume in the north of trades at $123-125
live and $195 dressed will leave packers short of next week's slaughter
needs and cattle owner with storm stressed cattle they may or may not
The largest drag on beef sales has been the grind. The
cold storage report released this week posted one of the largest inventories
of ground beef in storage for recent years. Most ground beef blends are
selling 50-75% under last year and continue to represent a large portion of
beef sales. Margins should be good for retailers and the timing good for a
turn to beef. Both choice and select cuts gained late week. The choice cut was quoted at $204 and select lower at $195
leaving the spread at $9.
The feeder index has been falling in dollar multiples as
cash prices tumble for replacement cattle across the country. Most auction
barns will be closed this week. Oklahoma City was the exception and trading
was active with demand good and prices up to $5 higher. Trading in yearling cattle is drawing to a halt for the
year as most replacement cattle hold off marketing plans until after year
end. Feedlots sitting with empty pens need cattle but with lousy margins and
oversized losses on current close outs, there is little optimism.
Corn futures fell in late week trading. The corn basis is
remaining flat in most regions. Corn remains in a
trading range between $3.50 and $4.00 a bushel. The corn basis in Guymon,
Oklahoma is currently quoted at +$.40 over the December contract. Corn is
now pricing into rations at $7.15 cwt. in the Oklahoma Panhandle.
CHASING A MIRAGE
Time was when fed cattle traded every day. Bid ask spreads
were .50 apart and a big move in the market was $1 in a week. Cattle traded
live weight at the feedyard and were weighed at daylight with a 4% shrink.
In the 1960s a futures market in live cattle was created to track that
market and provide a risk vehicle for producers, processors and retailers
and attract the speculators so necessary to any successful futures market.
That day is long gone and in its place is a futures market
looking for a cash market and unable to find it because it isn't there. The
dictionary defines "mirage" as something that appears real but isn't. We all
know the reality of a mirage in the desert where images of water in the
distance disappear as we approach. The same phenomena is at work today in
the live cattle contract when participants are looking for a cash market and
can't find it. They can feel it but can't find it. Therefore, volatility is
The reason they can't find it is because it doesn't exist.
The reported cash transactions comprise less than 5% of the thousands of
trades executed every week but unavailable to a transparent look at the
market. The culprit is not HFT [high frequency trading], it is the mismatch
between a outmoded live cattle contract and the current cash market where
over 75% of all weekly transactions are traded on a dressed basis.
The dysfunctional live cattle contract is not the only
problem. USDA has a reporting system that has failed to keep up with the
times. As methods and protocols changed for trading fed cattle, mandatory
price reporting stayed the same leaving the reports today without any
material content. That can be changed by rule making and the newly
Congressionally approved mandate need to insist on a major reworking of the
rules to define spot sales, forward sales, basis sales and negotiated grids
in a meaningful reportable form.
Finally CME owes the industry the responsibility of
opening trading for a new YG3 Choice dressed cattle contract. The industry
owes the CME the support for a new contract to begin trading side by side
with the old contract leaving traders a path to exit the old contract and
move into the new one.
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||1,307.93||174.39
|Cost of Gain 600 pounds||475.93||0.79
|Estimated Interest(Prime + 1%)||31.66||
|Net Profit / Loss||-121.30||-8.99
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||1,740.00||232.00
|Cost of Gain 600 pounds||523.50||0.87
|Estimated Interest(Prime + 1%)||34.96||
|Current Texas Panhandle Cash||1,713.69||126.94
|Net Profit / Loss||-584.77||-43.32
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