January 18, 2016 

                    

 CATTLE MARKET REPORT AND ANALYSIS

  
BOC Loan

 

PLAINS MARKET TALK

 

Cash Cattle. Weather and smaller show lists put optimism in this week's cash expectations. A smaller sized offering on the online exchange will help prop prices up for the public viewing today. Power outages plagued areas of the Texas Panhandle feedyards but a warming trend should allow restoration of services. Asking prices moved from $122-125 in most areas.

 

Nebraska sales topped the market last week with almost 15,000 bringing $120 late Friday. Kansas and Texas sold the bulk of cattle at $119 with only isolated sales mid week at $120. Dressed sales in the north were mostly at $190.

 

President-elect Trump has yet to fill the USDA post of secretary of Agriculture. Trump drew strong support from the rural areas and rural agriculture will not want a token selection. Trump also has been pushing for a weaker dollar and the dollar has dropped in the past week favoring our exports.

 

Cattle Futures. Futures moved higher as traders expect more gains in the cash market.   

 

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 December 31st, had steer carcass weights up 3# at 900# hovering just above last year. Winter weather will dominate changes from now into spring when seasonally carcass weights begin to rise.

 

Forward Cattle Contracts:  Sales are reported by USDA each Monday and below are those for the largest volumes of beef cattle. Last week the volumes of forward sales slowed as packers developed ideas that cash prices would turn downward. The basis also declined.

 

MONTH HEAD BASIS
     
FEBRUARY 2500 +2.50 FEB
MARCH 9000 +1.50 APR
  3000 +3 APR
APRIL 13,100 +1.5 APR

     

 

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. Box prices were mixed at mid week. Slaughter levels moved back of prior week as road conditions slowed the slaughter as some plants. Plants were expected to make up the difference on Saturday. Packer margins lost ground on all fronts as live cost rose and wholesale cut fell. The mostly $100-150 margins at the beef plant disappeared leaving some question as to the level of slaughter in the coming week.

 

Heifer placements are increasing in the nation's feedyards with each new placement month. The role of increasing heifer placements is important in assessing the stages of the cattle cycles.  Current placements would seem to indicate the expansion buildup of the national herd is drawing to an end. 

 

 

 


 
Choice CutoutChoice Price Change
191.62Up $0.82
 
Select CutoutSelect Price Change
187.23Up $0.69
 

 

 

 

 

Replacement markets

 

January and February purchases of replacement cattle are usually populated with groups of cattle that have gotten out of condition. It is easy to wait too long on a short wheat field or attempt to get by with sub-standard feed in a grow yard, but the results will be enjoyed by the buyer who will benefit from good performance on cattle that will finish before the heart of summer heat. There still remains two months of winter weather that can cloud performance but the cattle will finish in an ideal time for weather.

 

Weather is always a consideration in winter. Newly purchased calves will face extreme stress in the Texas Panhandle and Kansas as cold, wet, freezing rain hits those areas of the country that up until now have been dry. The condition that is so valuable to the buyers also is a state putting the animals at risk in bad weather.

 

Oklahoma City. Severely restricted receipts were met with steady prices as icy roads hampered transportation and care of livestock. 

 

Feeder futures posted modest gains in most trading months.               

 

Feeder Cattle Cash Index. The index for settling the January contract is now converging as the contract winds down into the expiration.     

 

Forward cattle contracting. The feeding companies have become more active in purchasing spring feeder cattle. Few contracts are flat priced. Most are basis transactions with basis prices of par to negative $3 cwt. for 800# steers delivered to the Texas Panhandle.

 

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

 

Corn futures. Grain prices moved higher. Corn basis quotes are moving higher at 25 cents over December in Guymon, Oklahoma. Corn is now pricing into rations at $6.75 cwt. in the Oklahoma Panhandle.

 

THE LONG AND THE SHORT OF IT  

 

While boxed beef prices were crashing, sometimes at the rate of $4 a day, futures prices for live cattle were soaring….. so what is going on? The simple explanation is you are witnessing two differing views of the market. Retailers pulled out of the short term spot market for boxes and left prices in a free fall. Index funds, protecting customers from threats of inflation by going long cattle futures among other commodities, had more customers to serve as more optimism by business owners and large corporations entered the market.

 

The macro view holds that a more favorable business climate translates into higher commodity prices caused by more employment and more disposable income as wages rise. This view is not looking for daily or weekly trends but towards a cyclical trend over a period of months. People who stake this type bet are not hedging a pen of cattle with 4-10 contracts but are investing millions of dollars on the long side of cattle contracts.

 

The increase in the number of contracts owned by the index funds has contributed to an increase in the open interest in all cattle contracts. Increasing volumes of transactions in the futures market is good for the market and provides much needed liquidity. The increases are better if they are sustainable and not one time increases. If the CME moves the contract to a cash settled contract, more traders will enter the market.

 

On the other side of those index transactions are the cattle feeders who, starved for a profit, see an opportunity to lock in a margin. The recent profile of the cattle feeding industry has featured a small percentage of operations working in the fully hedged mode. This is not because of optimism that prices were going to rally, but is simply because of a lack of opportunity to find futures prices at a sufficient price level allowing feeders to lock in a profit. With the recent run up in futures prices, that has changed and the percent of feeders taking protection in the futures market has increased.

 

Differing views of the same market is not unusual. An investor looking at a 6 month horizon will pay less attention to the daily fundamentals of the market. Short term traders focus on the daily signals of the spot marketplace. Both are important and both have a bearing on market trends. As with any industry, the most important barometer to a sustainable cattle contract is profitability. It is when all sectors of the beef industry can enjoy a margin, that the industry can be judged as healthy and the futures contracts function as they are designed.  

 

 

 

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 Steer982.13130.95
Cost of Gain 600 pounds420.170.70
Estimated Interest(Prime + 1%)27.81 
Current Breakeven1,424.94105.55
Current Futures1,404.41104.03
Net Profit / Loss-20.53-1.52

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 ago1,065.00142.00
Cost of Gain 600 pounds420.840.70
Estimated Interest(Prime + 1%)24.90 
Resulting Breakeven1,510.74111.91
Current Texas Panhandle Cash1,606.64119.01
Net Profit / Loss95.907.10

 

 

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