May 31, 2016 

                    

    CATTLE MARKET REPORT AND ANALYSIS

  

 

 

PLAINS MARKET TALK

 

 

Cash Cattle. It is hard for some to view this past week's market as positive but the tone at week's end was just so. The notion that prices fell further than necessary driven by a futures market that at times seemed bottomless until the late week recovery. Cash cattle lost $7 cwt. for the week with most cattle selling at $125 however packers picked off a few cattle in the north late Friday at $126 and raised dressed bids to $127 live and $200 dressed in the north late Friday. This is some indication of confidence in the market.

 

The cash market has been moving up and down in large price blocks. Last week it was down $7, previous weeks in the recent past witnessed rises of $5-6 on the upside. These weekly moves in $5 ranges are large and volatile moves where $50-75/head on cattle would be regarded by all beef producers as big money. Most would be content with a $50 profit for a 5 or 6 month feeding period. The most interesting aspect of the large weekly price moves is the fact that almost all week's this year have posted a cash price for the week of between $125-$135 with only a couple of small exceptions.

 

Fedcattleexchange.com The new initiative to auction fed cattle on the internet got off to a rocky start this past week. The auction was handicapped by the early week rout in futures for a start. Combine that problem, with technical glitches, a lack of trade standards, no settlement and clearing function and the take away is the site needs more work. Bidding with an auction format should develop a competitive climate among buyers but instead only one or two advances for each lot were recorded. Prices ranged from $123-125.50 across the spectrum of cattle feeding regions. Also the differentiation in price failed to develop. The choice/select spread is close to $20 cwt. yet cattle described as higher grading cattle failed to attract premium bids.

 

Cattle Futures. The technicians and chartist were all over the trading after this past week's price action. Some saw confirmation of a double bottom. Others noted important chart patterns showing a new low followed by a key reversal and a higher close topping the previous day's high. On Friday the contract was flirting with breaking out from the 40 day moving averages. While this information may be meaningful to some, the bottom line is some folks were ready to take a more positive view of the summer beef picture. In the end, fundamentals of beef demand will rule.

 

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 May 14th reflected carcass weights steady with last week but 4# under last year. Seasonally, carcass weights should begin to rise as spring and summer performance improves. 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: Packers now are purchasing cattle for the delivery month and will continue downward pressures hoping to purchase live inventory cheaper and maintain generous margins. Buying forward has been a useful tool for lowing cash prices for spot delivery. Packers and retailers have benefited for forward purchases and now will turn their attention to lowering cash prices to the futures spot price. The question will be whether current fed supplies will allow them to buy cattle lower.

 

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

 

The Cutout. Retailers are expected to re-engage next week as buying for the father's day weekend is upcoming. Margins remain good at the processing and retailing level. This past week's slaughter remained steady at 587,000 cattle and will be shortened in the coming week. All participants in the beef trade will watch the clearance in stores this weekend. Volumes of sales of boxes increased this past week although prices were lower. 

 

The weekly choice/select spread widens in the spring and normally peaks around this time of the year. The spread this year has jumped up above last year and the five year average. This is some evidence of pulling forward of cattle and the current state of the fed cattle supplies. It also reflects another trend in the beef business. As retailers have switched to carrying more choice product as a result of better grading, they need to pay whatever premiums are necessary to continue a choice only program. When grading declines, competition increases and pushes choice higher.  

 

 

 

 


 
Choice CutoutChoice Price Change
222.07Down $0.65
 
Select CutoutSelect Price Change
201.57Down $1.69
 

 

 

 

 

 

 

 

 

 

Oklahoma City. Prices as expected were $5-10 cwt. lower on all classes of replacement cattle. Feeder steers weighing 7-800# sold from the mid $130s to the low $140s. Feedlots are realizing the entire pricing scheme of replacement cattle needs to ratchet down. The full brunt of the price decline will eventually fall on the breeder as all segments of the industry in the live animal sector struggle for profitable operations.

 

Holding cattle for higher prices has been a loser. Cattle moved off pasture this spring have been heavier because winter performance was good but also because they have stayed longer on pasture. Many operators decided to hold some cattle past May in an effort to find a better period of time frame with smaller offerings. June may provide success for holders of replacement cattle as price move off the spring lows.

 

Feeder futures found a bottom and continued higher although the pace slowed.      

 

Feeder Cattle Cash Index. The index will track for several months the cash market but will be a long distance from settlement in late August.       

 

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

 

Corn futures. Traders are sensing troubles with the South American crop are those troubles are translating into a speculative push of all grains higher. Joining in that momentum is the notion that commodities in general are due a rally after getting beat up for the past year. Feedlots switching to wheat will pressure the corn basis and leave many bushels of corn to be sold at unusually narrow basises in the summer. Wheat is trading into many feedyards at .40-.50 under the July contract. The corn basis is currently around 15 over the July contract in Guymon Oklahoma down from .60 over last year.  Corn is now pricing into rations at $7.30 cwt. in the Oklahoma Panhandle compared to wheat at $7.25 cwt..

 

 

BLOCKCHAINS

a new tool for cash reporting for the cattle industry

 

A Blockchain is a public ledger of all transactions that have ever been executed in a particular market. It is constantly growing as ‘completed’ blocks are added to it with a new set of recordings. The blocks are added to the Blockchain in a linear, chronological order. Each node (computer connected to the designated network) is required to be approved by the governing datastore as an approved client. The approved client performs the task of validating and relaying transactions to the parent datastore and in return gets a copy of the Blockchain, which gets downloaded automatically upon joining the marketplace network. The Blockchain has complete information about the IP addresses [internet addresses, geographic region, etc.) of the clients and their balances right from the genesis block to the most recently completed block.

 

Blockchains have been popularized for their use in Bitcoins – an attempt to create a universal global currency. The Blockchain is seen as the main technological innovation of Bitcoin, since it stands as proof of all the transactions on the network. A block is the ‘current’ part of a Blockchain which records some or all of the recent transactions, and once completed goes into the Blockchain as permanent database. Each time a block gets completed, a new block is generated. There is a countless number of such blocks in the Blockchain. The term was created when the Blockchains are linked to each other (like a chain) in proper linear, chronological order with every block containing a hash of the previous block.

 

To use conventional banking as an analogy, the Blockchain is like a full history of banking transactions. Bitcoin transactions are entered chronologically in a blockchain just the way bank transactions are. Blocks, meanwhile, are like individual bank statements. The beauty of the Blockchain system is its ability to adapt to any market. No market would benefit more than the cattle markets where little innovation has developed over the past 50 years and the markets are crying out for more price transparency when none exists.

 

The starting point for cattle price reports would be feedlots. The data base will reside with a trusted third party or cattle association and the member codes would be held offsite and be protected against accidental exposure. All firms agreeing to participate and submitting blocks of price transactions would receive access to the composite Blockchain providing complete and real time data price points. No individual client would be able to view any other clients information but all could view the composite.

 

Depending on the level of participation, the country would be divided into reporting regions in a manner protecting the proprietary information provided by the clients. Cattle descriptions would be divided into 1) beef breeds, 2) Dairy breeds, 3) Mexicans. Calves would be divided into weaned and unweaned. All Value Added cattle or premium programs, such as NO antibiotics or hormones would be segregated. Reporting would be for stocker cattle, feeder cattle and fed cattle but could include markets like boxed beef if processors were interested in using the Blockchain tool. Delivery periods would be noted for each transaction. Each transaction would be reported as a flat price or a basis price with the associated futures month or delivery month if it were a basis trade.

 

Market clients would be able to view their transactions, whether purchases or sales, [their block] and compare to the aggregate Blockchain. Indexes could be created and could serve as benchmarking against futures settlements or cash transactions. There would be little reason for any industry firms not to participate and the cost would be very small when compared to the information provided. A governing board elected by the clients would establish the rules and regulations governing all reporting. The governing board would need to have authority for a third party audit of outliers or blocks that failed to fall within normal ranges. Audits would be done by independent third parties selected by the governing board.  There are too many impediments to bring about a change in mandatory price reporting. The industry would be better served to create an industry model requiring no authority to operate other than the shared mission of the clients.  

 

 

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 Steer1,095.68146.09
Cost of Gain 600 pounds505.590.84
Estimated Interest(Prime + 1%)30.15 
Current Breakeven1,625.19120.38
Current Futures1,566.00116.00
Net Profit / Loss-59.19-4.38

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 ago1,110.00148.00
Cost of Gain 600 pounds523.910.87
Estimated Interest(Prime + 1%)25.37 
Resulting Breakeven1,659.28122.91
Current Texas Panhandle Cash1,776.33131.58
Net Profit / Loss117.058.67

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