PLAINS MARKET TALK
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
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.
are released each Thursday and will be a closely watched barometer
indicating the position of cattle feeders in the nation's feedlots. The last
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.
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 Cutout||Choice Price Change
|Select Cutout||Select Price Change
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
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.
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..
TRADING IN THE FEEDER CATTLE ARENA
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
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
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.
NOTE TO READERS
Sections of the newsletter are redesigned with hyperlinks
to the appropriate source pages. The hyperlinks are in light blue within the
FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE
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.
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||1,026.98||136.93
|Cost of Gain 600 pounds||449.19||0.75
|Estimated Interest(Prime + 1%)||27.96||
|Net Profit / Loss||-22.37||-1.66
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||1,200.00||160.00
|Cost of Gain 600 pounds||475.37||0.79
|Estimated Interest(Prime + 1%)||26.59||
|Current Texas Panhandle Cash||1,620.00||120.00
|Net Profit / Loss||-81.96||-6.07
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