April 20, 2014
CATTLE MARKET REPORT AND ANALYSIS
What started as a few lower quality cattle trading for
$146 in Texas late Wednesday turned into a general victory for packers who
were able to purchase cattle $1-2 lower across the plains on Thursday.
Packer margins have been red and this week marked the first improvement as
input cost fell and sale prices rose. In the north cattle traded $149-150
live and in the beef sales at $238-240.
In an every increasing need to arrange for future supplies
of cattle, packers are making offers out in front for future deliveries of
cattle. Typically, cattle have traded this week for next week's delivery.
Packers have always been willing to negotiate basis trades for forward
deliveries but usually the basis offers failed to be attractive enough to
cause cattle owners to book sales this way.
Packers now are developing more beneficial forward
contracts. These offers come in a wide variety of forms. Some recent example
include 1) flat price trades with two week pick up instead of one week; flat
price bids for forward months with equal pickup numbers each week; 3) basis
trades for weekly or monthly pickup. For example some May cattle traded in
the north this week for $232 in the beef. While that price is far short of
the $238 current price, it is the equivalent of $147 live or $12 over the
June futures at $135. All of these options have the additional benefit of
providing a consummated trade without having the transaction reported.
Box prices ended the week on a strong note and posted
small gains almost every day. Packer inventories are thin and this allows
them to position for retailers who will need to purchase inventory for the
coming week when beef will find a more prominent place on the meat counter.
Choice box prices were quoted $2 higher at $226 for choice and select $1
higher at $215. The choice/select spread is $11.
Feedlots backed away from sky high replacement cattle at
week's end. Futures fell almost $2 following an extended up period that has
many contracts trading at all time highs. Receipts at major auction barns across the country were
falling in an indication of shorter supplies to come. In California
and Arizona some feedlots were repositioning light dairy calves to other
regions of the country as the closing date nears for National Beef's Brawley
plant. It is unclear whether these placements will be counted twice in USDA
placement numbers. A 750# steer in the south was
selling for $179.
A quick look at the year ago price comparisons for feeder
cattle tells the story of replacement costs. A year ago a 750# feeder steer
was selling close to $130 and today close to $180. The $/head is $1350.
Operators at every level are tallying the $/head and especially the bankers.
The value of a 750# steer has increased $350/head over the past year. Time
is not long pasted when $350 bought a pretty decent feeder steer.
Corn prices fell in late week trading. The spot May contract moved
back below $5. Exports of corn has been brisk this year and is pulling down stocks,
but world production is increasing.
The basis is 65 cents
over March corn for Guymon
Oklahoma. Corn is pricing into most rations at $10.00
cwt. in the southern plains.
A MUTUAL INTERDEPENDENCE
Suspicion and distrust are not unusual words used by one
party to characterize the opposing party in cattle price transactions that
are at the heart of every week's business. Whether your interest are at the
feedlot level or the beef processing level, weekly changes in fed cattle
prices favor or disfavor one of the parties. This weekly conflict belies a
greater need for each -- that both the cattle feeder and the beef processor
prosper and continue in business.
At no time has this relationship been tested more than the
recent couple of years of record breaking grain prices and downsizing of the
national cattle herd. Downsizing has meant coping with oversized facilities
built for another time when cattle were plentiful. Over capacity means
forced reduction of both processing plants and feeding capacities.
Downsizing hurts and losing money over prolonged periods is painful whether
you are in the beef plant or the feedlot.
The tug of war between fed cattle offerings and demand for
beef is a complex matrix and just when someone believes they have figured it
out, a surprise in the marketplace surfaces that changes it all. Demand for
beef has been slow to develop this spring and some feel it is on the way.
Processors have pared back the slaughter to record low levels because of
negative margins. Supplies of fed cattle are increasing and the balance
between increasing supplies and increasing demand will feature a new price
point. No one knows how that will play out.
Packers successfully lowered input cost this past week
while at the same time raising box prices. This happened by reducing the
slaughter. The match up is fairly simple. Cattle feeders can refuse lower
bids and force higher prices at will for any given week. The problem is the
next week and the next. If they refuse lower bids and only sell a few cattle
at higher prices then they carryover more cattle and so on until numbers
build and they are compelled to sell rather than suffer overweight
This tension between supplies and demand is constantly at
work. The ideal situation of both processor and feeder profiting is rarely
at work or if it is at work -- not for long. Typical cycles are for one of
the parties to be profiting while the other is suffering. The last either
would want is for the other party to lose money for such a prolonged period
that they go out of business.
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.
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.
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