May 22, 2015  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

 

  

PLAINS MARKET TALK

 

 
                        U.S. CATTLE ON FEED ESTIMATES
                   IN YARDS WITH MORE THAN 1,000 CAPACITY
 
                                                  AVERAGE            RANGE
                                   ACTUAL       OF ESTIMATES     OF ESTIMATES
CATTLE ON FEED            May           101            101.7      101.0-102.4
PLACED DURING           April            95            102.4       97.4-105.5
MARKETED DURING         April            92             92.4        91.7-94.0
 

An early release of the COF report has some puzzled for the second month by placements missing pre-release targets by 5% or more. It is almost like some numbers were crossed between March and April placements.

 

 

Trading is mostly concluded for the week with short bought packers having to push the market at mid week. It was mostly a steady affair with prices ranging from $160-$163 live and $251-253 dressed. Packers also purchased additional cattle into June at $160.

 

Box prices weakened in anticipation of a larger slaughter number this week. Most cuts lost $2-3. The period from now until July 4th is prime time for beef demand. The cutout set another all time high this week contrasting with live prices remaining a good $10 cwt. under the all time high. Choice cuts were at $262 and select at $249. The choice/select spread is currently $14.

 

The May contract expired with little attention. Feeder cattle supplies remain tight as breeders capture many of the heifer yearlings for calf production aided by generous rains across the plains. Rains also have slowed movement of cattle off winter grazing locations and diminished auction receipts. Oklahoma City had smaller receipts as stocker operators struggled to get into wet fields. Prices were quoted at $3 higher or yearlings. A 750 steer on the southern plains was selling for $220.

 

Corn turned back higher with the additional rains. Cold weather concerns were dismissed as traders get back to the fundamentals of a good start to this year's corn crop. The corn basis in Guymon, Oklahoma is currently quoted at +$.60 over the July contract. Corn is now pricing into rations at $7.75 cwt. in the Oklahoma Panhandle.

 

COOL APPEAL DENIED

 

USDA suffered another defeat by the World Trade Organization as its final appeal of the COOL law was refused giving Mexico and Canada the ability to place retaliatory measures in place to compensate for the now illegal trade law. The COOL law is an example of an ill conceived plan, hastily drafted, passed without thoughtful consideration and in the end benefiting no one.

 

The COOL story is really a sad commentary on NCBA and its lobbying ability. The national cattle organization failed its membership and the entire industry. The legislation combined with rulemaking by USDA burdened the producers and processors with hundreds of millions of dollars of additional cost with full knowledge the consumer doesn't know or care about the country of origin.

 

It is unfair and irresponsible to blame the problem on a small group of jingoistic cattle folks who honestly believe segregating and marketing USA beef will be a benefit.  The industry should have enough clout to have stopped it. It has caused more cattle to be fed in Mexico and cost our beef business many lost exports and needed imports of stocker cattle.

 

THE DEMAND PICTURE

 

It is not easy to define the demand side of the beef equation. Many consumers confuse the consumption of beef with demand for beef. Everyone agrees with the data evidencing the decline in beef production and if you produce less beef, consumption will decline. Some analysts incorrectly point out that consumers are turning away from beef during the past couple of years pointing to evidence of declining consumption.

 

The fact is beef demand has remained quite good in the face of declining production and sky high prices. Consumers are spending increasing amounts of their household budget on beef but beef is remaining in the diet -- although in decline quantities. Even beef exports are sustaining good demand during this period of production even though the volumes are smaller.

 

The source of declining production of beef is part of a cycle and has multiple causes. One cause is changing consumer attitudes towards beef. This can be a health threatening food scare like mad cow or ecoli or a health trend like the cholesterol scare of the 1980s. Another cause is overproduction resulting in too much beef at prices too low to return a profit to producers. The last cattle cycle was neither of these causes but instead was an uncontrollable cause, it was a weather related event. Droughts have always been around and always will be part of our existence on the planet earth.

 

Beef production is built on these cycles. The multiyear drought severely restricted breeding and caused many disruptions to normal consumer use of beef. It also caused structural changes to the beef chain. Many fast food restaurants were forced to change their menus and offer more diversified meat offerings -- the advent of the turkey burger and other non-beef offerings. Grocery chains reallocated shelf space and changed from frequent beef features.

 

USDA revised its production forecast for 2015 and is expecting slightly more beef produced than 2014.  In spite of increased carcass weights running 3% over prior year, the first half of the year will feature a decline in production. If we produce more beef this year than last, it will happen in the second half of this year and given the optimum pasture conditions it is unlikely cattle will be pushed off pastures into the feedyards anytime soon.

 

All of this can change once again as the beef production cycle shows the strength of the industry. Beneficial rains across the plains have made possible rebuilding of the herds and they are responding in record speeds spurred on by sky high prices for calves. As production increases and prices fall, the marketing chain will seek out ways to win back consumers to the new increases in supply of beef.

 

FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES

 

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 futures contract.

INPUTSTOTAL$$CWT
750 # Feeder Steer1,652.25220.30
Cost of Gain 600 pounds482.830.80
Estimated Interest(Prime + 1%)38.83 
Current Breakeven2,169.15160.68
Current Futures2,082.38154.25
Net Profit / Loss-86.77-6.43

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 ago1,725.00230.00
Cost of Gain 600 pounds550.670.92
Estimated Interest(Prime + 1%)34.94 
Resulting Breakeven2,310.61171.16
Current Texas Panhandle Cash2,171.61160.86
Net Profit / Loss-139.00-10.30

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