July 24, 2016 



BOC Loan






Cash Cattle. This past week featured some important differences from recent trade weeks. Cattle traded every day of the week. Beginning on last Monday with futures lower, cattle traded at $187 dressed in the north. By week's end some cattle sold at $182 dressed with each day offering more transactions each at a lower price. The live cattle traded in a narrower range from $114-116 with the bulk bringing $115 at mid week. This brings cash prices to the lowest level of the year and the lowest price in 4 years.


With slaughter levels hovering around 600,000 head, packers will have to continue purchases in order to book generous margins currently available in the processing business. Because of the large amount of cattle offered for current delivery, packers have the leverage to protect margins and pass along benefits of lower prices to retailers who also are finding good margins at the nation's supermarkets.


                        U.S. CATTLE ON FEED 
                   IN YARDS WITH MORE THAN 1,000 CAPACITY
                                                  AVERAGE            RANGE
                                   ACTUAL       OF ESTIMATES     OF ESTIMATES
CATTLE ON FEED           July           101            101.6      100.9-102.0
PLACED DURING            June           103            106.1      103.8-109.9
MARKETED DURING          June           109            109.7      108.1-111.0


The USDA Cattle on Feed report with quarterly statistics included a surprise on the placement side as June placements fell 3% short of pre-release guesses. The on feed number was 1% over prior year with marketings on the pre-release mark. The detail found in the report confirmed the fact that many of those placements are heavy cattle weighing over 800#. This will increase turnover in the feedyard and assure the processors a steady stream of cattle through the balance of this year.


Heat continues as a factor in the beef market both on the live side and in the retail store. Triple digit temperatures across much of the midwest will slow cattle performance in the feedlot and decrease demand in the supermarket. 10-15 day outlooks are now calling for milder temperatures. This type heat is not unusual for mid summer.


Except for isolated instances, cattle close outs have lost money for the past two years. Breakevens are lowered with each month's purchases and even grain is helping to lower the price level at finish necessary for a profit. There will need to be a pause somewhere in the string of red ink in order to sustain a viable feeding industry. Demand for beef is the key and stimulating the demand is complex and requires thought and strategy on the part of the entire industry. Menus need more beef options. Young people entering the work force out of college need a better opinion of the value of beef in the diet.


Cattle Futures. Futures prices reversed the downward direction and regained some of last week's losses. The downward direction of the futures has been unrelenting. Brief rallies of a day or two barely interrupt the downward trajectory and traders seem unwilling to gamble on picking a summer bottom and who can blame them. Reasons and justification for these extreme moves up and down abound but few make any sense and the moves have little to do with market fundamentals. Each leg down has been followed by another leg down causing all contracts to trade at life of contract lows.


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 July, 9th had carcass weights up 7# to 875# remaining 10# below last year. Seasonally, carcass weights should increase until next winter. The important references will be comparing carcass weights this year with last and determining how those weights impact overall tonnage when compared to prior year.


Forward Cattle Contracts: With the long sustained positive basis to the futures, there is little interest on the part of feeders to forward contract cattle anywhere close to par with the deferred futures. Cattle feeders who have already priced the basis of cattle forward but not yet picked a price point are stuck with a quite low price to the current cash. 


The weekly breakdown of fed cattle moving to the beef processing plants is as follows. 1) formulas 55%; 2) negotiated 20%; 3) forward contracts 25%.


The Cutout. The cutout flattened out at week's end bear the $200 level -- a place where many think it will find retail support. Retailers, finding more margin in the beef inventory, will continue to provide beef features allowing a support point in the cutout. The key to the market direction will be the size of the slaughter and the cutouts ability to stabilize around $200 on the choice cutout and be able to slaughter 600,000 cattle in a normal week. As time moves forward, the slaughter will not be decreasing, but instead more fed cattle will come to market along with more cows. The industry will need to rely on improving demand and increasing exports for price stability. 


The choice/select spread has narrowed from $25 a few weeks ago to $10 reflecting more choice product in the pipeline and the fact many of the calf feds are cleared. 




Choice CutoutChoice Price Change
200.09Down $2.19
Select CutoutSelect Price Change
189.57Down $2.79







Oklahoma City. Replacement prices were higher for yearlings as light mid summer receipts were met with good demand for feeder cattle of all weights. The lower cash prices for fed cattle and the lower futures will change the environment for replacement cattle this coming week. The markets for weaner calves is growing cautious with summer heat and dry pasture conditions in some areas holding back demand for high risk calves.


More yearling cattle are being moved off hot and sometimes dry summer pastures. The scorching temperatures of the past several weeks have taken a toll both on the cattle and the pastures. Feeder cattle are reflecting the same behavior as the fed markets as the current cash prices bring premiums to a discounted feeder board. This will encourage more cattle owners to sell mid summer rather than hold cattle for later delivery assuring heavier discounted weights.


Feeder futures followed live cattle futures higher aided by a lower trending grain market. Futures are trading well under the index.        


Feeder Cattle Cash Index. The index that has been trading premium to the August board is narrowing the gap and currently trading close to par with the August contract. Basis trades off the October contract vary for July from -$1 to +1 for a 775# steer.  In November the contract moves to a 800# base weight.       


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


Corn futures. The hot weather is in the news but less mentioned is the fact that 76% of the nation's corn crop is in good to excellent condition. It would be premature to book a big crop for this year but this number gives some comfort to those who might fear a bust in this year's crop. The corn basis is currently moving higher. Quotes over the September are around +20 cents in Guymon Oklahoma down from .60 over last year. Corn is now pricing into rations at $6.50 cwt. in the Oklahoma Panhandle compared to wheat at $6.25 cwt..






The recent focus for reform has concentrated on the live cattle contract where significant impairments to the contract exist and are driving traders away. Little mentioned is the fact that the feeder contract is also troubled and those operations relying on price protection in this market are finding a marketplace that is barely hanging on and a liquidity pool that is drying up. Open interest in the feeder contract is a small fraction of the live cattle contract and live cattle contract is a small spot on the wall when compared to some of the larger CME contracts like the Eurodollar.


The feeder contract differs from the live cattle contract in that the contract is a cash settled contract. CME has created an index whose construction depends on publicly available information pulled from USDA feeder cattle market reports. Some of those markets are public auctions and the prices are open and available for all to see. Other transactions in the index are taken from USDA reports using telephone calls to some of the feeding companies asking for purchase information on recent transactions. The sell side of each transaction is not confirmed with stocker or breeder selling sources.


When users of the CME feeder futures make their way to the futures marketplace, they will find a sparsely populated order book. The spot month will have more orders listed with smaller spreads but when trading in the deferred contracts out 6 month or more, few orders exist and most are 1s or 2s and often the spread is .50 cwt. apart. Even in the spot contract, it is unusual to find a order greater than 5 contracts. The result is anyone putting on a position or taking one off involving 10-20 loads will soon find they are moving the market over a dollar with a small volume.


Breeders and stocker operators need a viable futures market. Grazing seasons, lasting 6 month or more, involve the purchase of new stock for the grazing venture then sometimes laying off some of the risk on the grazing venture. While laying off the price risk is only part of the transaction, it is an important component. Weather, animal health, care and other variables will always be changing but price protection is at the top of the list.


The feeder contract would benefit from an industry wide Blockchain that would share without attribution the thousands of transactions going into the daily, weekly and monthly transfers of ownership of replacement cattle. An index could be created relying on the shared or distributed data in the Blockchain giving all participants confidence in the cash settlement price. Weighted averages could be created for regions of the country giving guidance for basis transactions to occur. Finally all the information would be verifiable and auditable but each parties own proprietary information protected.


The feeder contract suffers from the same impairment as the live cattle contract -- poor liquidity. An improvement to the cash settlement index would bring new traders and speculators to the market and an improved market book to the contract. Traders are looking for any market they can see and understand. This means they can develop their own theories of price direction and not be worried about getting in and out of the position because of poor liquidity.








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 Steer1,026.98136.93
Cost of Gain 600 pounds449.190.75
Estimated Interest(Prime + 1%)27.96 
Current Breakeven1,498.59111.01
Current Futures1,476.23109.35
Net Profit / Loss-22.37-1.66


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 ago1,200.00160.00
Cost of Gain 600 pounds475.370.79
Estimated Interest(Prime + 1%)26.59 
Resulting Breakeven1,701.96126.07
Current Texas Panhandle Cash1,620.00120.00
Net Profit / Loss-81.96-6.07

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