December 12, 2018                                  

                

 CATTLE MARKET REPORT AND ANALYSIS

  

 

PLAINS MARKET TALK

 

 

Cash Cattle.

 

Packer opening bids in the north were at $187 dressed or steady with last week. The price failed to attract any sellers who are asking higher prices of $190-192. Show lists were flat with last week. The rapid fire absorption of cattle into the beef chain will keep packers busy replenishing inventory. The box market continues to give signals of wanting more beef but cattle owners will want a bigger piece of the pie. Asking prices are at $122.

 

Sales in the south last week were mainly at $119 live and $187 dressed in the north -- both prices one to two higher. Volumes of sales were good but as the slaughter demands demonstrate, the need to replenish continues.

 

The weekly slaughter has two major components -- cows and fed cattle. For the first week in many, fed cattle slaughter jumped well above last year. At the same time fed slaughter was increasing, the cow slaughter was falling. The cow slaughter of recent has fallen under last year after months of larger cow slaughter. The implications to the growth of the national beef cattle herd are important to any statistical analysis of future markets.

 

Cattle Futures. Futures were higher in anticipation of higher cash prices. Hedged cattle owners will look for positive basis this week after selling cattle with a negative basis for several months.       

 

Carcass weights are released each Thursday [lagging the market by two weeks] and are a closely watched barometer indicating the position of cattle feeders in the nation's feedlots. The last report released for the week of November 24th, had steer carcass weights up 2# at 902# which 1# over last year. Heifers carcass weights are flat at 836# which is 5# over last year. Both numbers are well under two years ago.

 

Forward Cattle Contracts: Packer forward contracting is steady with most contracts of smaller numbers at $1 premium to the board except May where cattle can sell for $4-5 over June.   

 

The weekly breakdown of fed cattle moving to the beef processing plants is as follows. 1) formulas 55%; 2) negotiated 20% [both live and flat dressed]; 3) forward contracts 25%. Some of the formula arrangements are week to week negotiated prices and not committed cattle to one plant.

 

The Cutout. The beef cut out was mixed at mid week with choice lower as retailers wind up holiday purchases. The first quarter of the new year typically sees the choice/select spread narrow to the lowest point of the year. Packers have given up some of the generous $200/head margins but maintain a healthy $130/head margin.

 

Transportation cost touches every aspect of beef production. The movement is primarily by truck and includes delivery of cattle from farm to feedlot, feedlot to beef plant and finally beef plant to distribution. The decline of oil prices from $70 to $50 per barrel is positive for both cost and margins of all participants in the beef space. 

 

Beef imports also are creeping higher aided by a strong dollar. The U.S. is the largest importer of beef after China where beef consumption is on the rise. The government will be forecasting import estimates for 2019 that are expected to rise 2% over this year.

 

Beef Feature Activity Index. Buying will slow for interest in beef for post holiday periods. Next week will be the beginning of that slow down. 

 

Cutout Values as of Tuesday, December 11, 2018
Choice CutoutChoice Price Change
214.46Down $0.96
Select CutoutSelect Price Change
201.39Up $0.45
Choice/Select Spread
13.07

 

Replacement markets

 

The movement and number of transactions buying and selling replacement cattle will be slow between now and year end. For all the ups and downs in the replacement market, looking at the price trends for the year provides price stability not volatility.  Prices for yearling steers delivered to Guymon Oklahoma have mostly ranged in price from $140-150.

 

Oklahoma City. Prices were mixed with lighter yearlings higher by $2-3 and heavier offerings $1-2 lower. Calf prices also were mixed.                      

 

Feeder futures. Feeder futures were sharply higher.   Gains of over $2 were posted in the front months.

 

Feeder Cattle Cash Index. The index will now track the January contract to expiration. Futures are running ahead of the cash index leading it higher.      

 

Forward cattle contracting. The basis bids that exist are $3-5 back for 800# early spring steers delivered to the southern plains feedyards. 

 

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

 

Grain Futures. Corn prices held on to recent gains. Corn prices have been slowly moving higher for the past few weeks. The basis is currently at 50 over the December board in Guymon, Oklahoma. Corn is now pricing into rations at $7.75 cwt. in the Oklahoma Panhandle.

 

QUALITY GRADING  

 

Consumers depend on retailers to select cuts and qualities of beef offerings that fit their individual preferences. Those offerings are displayed on the meat counters of stores all across the country yet the biggest complaint is a lack of consistency of quality among the beef selections. The consumer might try a steak from the meat counter one week and find it greatly superior or inferior to a similar steak bought in the same location in a prior week.

 

In the northern beef plants, the percentage of fed cattle grading prime recently reached 13% and combined with choice graded cattle the two classes of quality grade comprised almost 90% of the fed cattle grades. Two changes have occurred over the past 10 years to cause this increase. Cattle are fed longer and to heavier weights and the angus breed represents a larger percentage of entire national cattle herd. Angus cattle are known to marble as a breed characteristic.

 

The problem created by the large percent of choice and prime animals, is the devaluing of the choice grade. The tight USDA marbling requirements span too large of a range of values to produce a consistent product at the meat counter. The intent of USDA quality grading is to promote uniformity but the wide range that includes moderate, modest and small degrees in the choice grade fails to deliver consistency to the meat counter or food service business. In spite of the fact the USDA still uses archaic terminology for quality grades [moderately abundant, slightly abundant, moderate, modest and small] the actual differences are larger than the terminology might imply to accurately and properly measured and need to be refined for marketing purposes.

 

Delivering a more uniform product to the consumer can be accomplished in at least two different ways. USDA could use the valuable tool of camera grading and create one or two more quality grades within the choice category. We won’t get into the naming of the new grades which would necessarily become a political football. The second option for beef plants is the creation of house grades. Nothing prevents the beef processors from creating house grades or brands and they do currently. Unfortunately, some of the brands create the same problem – brands labeled as Angus include a wide range of marbling and therefore create inconsistent qualities in the cuts.

 

As the beef industry modernizes production practices with animal ID, a natural development will be the creation of brands that represent something more than a marbling score. The desirability of the beef cut is not solely determined by marbling. Genetics and best management practices, used in the growing and harvesting of the animals, will be rewarded in the new link between the producer and the consumer. Individual tastes will always be subjective but targeting a uniform consistent product at the meat counter will always lead the way to more sales. The bottleneck will always be the limitations on sorting options of beef carcasses at the nation’s beef plants.

 

 

 

CATTLE REPORT LIBRARY

 

Below are links to articles published in the Cattle Report pertaining to industry change. The Beef Blockchain will be an important change in the beef industry and its application will transform and disrupt current practices.

 

THE BEEF BLOCKCHAIN

 

THE BEEF BLOCKCHAIN SLIDE SHOW

 

The Case for National ID for Cattle

 

Reforming the Futures Contract and Cash Trading of Cattle

 

 

NOTE TO READERS

 

Sections of the newsletter are redesigned with hyperlinks to the appropriate source pages. The hyperlinks are in light blue within the report.

 

 

 

 

FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES

 

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 futures contract.

INPUTSTOTAL$$CWT
750 # Feeder Steer1,105.13147.35
Cost of Gain 600 pounds435.120.73
Estimated Interest(Prime + 1%)30.83 
Current Breakeven1,565.72115.98
Current Futures1,563.30115.80
Net Profit / Loss-2.42-0.18

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.

INPUTSTOTAL$$CWT
750 # Feeder Steer OKC 150 days ago1,080.00144.00
Cost of Gain 600 pounds503.960.84
Estimated Interest(Prime + 1%)26.00 
Resulting Breakeven1,609.96119.26
Current Texas Panhandle Cash1,605.69118.94
Net Profit / Loss-4.27-0.32

 

 

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