October 6, 2015  







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.




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 prices realign.


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.







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.




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 Steer1,366.50182.20
Cost of Gain 600 pounds482.090.80
Estimated Interest(Prime + 1%)32.93 
Current Breakeven1,876.76139.02
Current Futures1,830.60135.60
Net Profit / Loss-46.16-3.42


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 ago1,665.00222.00
Cost of Gain 600 pounds512.890.85
Estimated Interest(Prime + 1%)33.56 
Resulting Breakeven2,211.45163.81
Current Texas Panhandle Cash1,621.89120.14
Net Profit / Loss-589.56-43.67

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