August 26, 2016 



BOC Loan






Cash Cattle. One aspect of trading packer buyers understand, is locating weak sellers and lowering the boom. Naturally no packer is in need of cattle for the foreseeable future, but if sellers must move inventory, they will try to accommodate. Wednesday's sales of $115 live turn into Thursday transactions at $112-113. Dressed sales in the north quickly fell from $184 to $180. This week's transactions have witnessed the cash prices falling faster than the futures.


Cattle Futures. August will expire next week and the cash and futures prices are on a path to converge with the cash doing most of the narrowing of the gap. Discounted futures are pulling the cattle to market and the October futures soon to be the spot month show no signs of changing the market direction. October has now filled the gap that has been closely examined by technical traders and all eyes are on what happens from here. 


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 August 13th, had carcass weights up only 1# at 887# remaining well below last year. Seasonally, carcass weights should increase until next winter. 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: Once again steep discounts in the deferred contracts will limit forward contracts.   


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


The Cutout. Beef processors will hold slaughter numbers as they rake in the profits. Next week will feature a buy for the holiday shortened Labor day week but rates may not drop anywhere near last year's levels as plants keep the beef processing facilities at work earning money. While demoralized sellers in the cash market for cattle, sell with any bid, packers are able to extract higher prices from retailers interested in filling good demand for beef at the stores.


The cow slaughter has remained consistently above prior year. Heifer placements are increasing in the nation's feedyards and all indications are that the ramp up in the nation's cow herd is concluding. The larger cow slaughter has also resulted in an increasingly large supply of frozen beef in storage.  




Choice CutoutChoice Price Change
201.14Up $1.07
Select CutoutSelect Price Change
193.87Up $0.27










Oklahoma City. Buyers are ready for another major reset of replacement cost as a falling fed market has caused many to believe nothing but lower prices is on the horizon. Monday's sale had feeder steers and heifers $4-$6 lower and now late week prices are adding to the decline.


Weather is cooling and improving moisture conditions are preparing the land for winter grazing with cattle operators wanting to inventory calves for grazing but wary of declining prices and watching the feeder board drop for fall prices predicting another large decline in the next couple months. 


The deep discount in the feeder futures will offer encouragement to stocker operators to market early rather than later. On the southern plains 750-800# yearlings that recently reached $150 are now forecast to be selling for south of $140 by October. Extra weight on yearlings with some carrying weight discounts, does not seem like a rational option when suffering a $5 price decline.


Feeder futures are falling and pessimism if taking over the psychology of both buyers and sellers. Seasonally feeder prices bottom in October.  This year the base weight on the contract changes in November giving a relationship between Oct/Nov a unusual pricing relationship with November a discount instead of premium.


Feeder Cattle Cash Index. The index is in decline mirroring the cash markets it is indexing. Futures now want to get a jump on the decline and are falling in front of the index. Basis trades off the October contract are quoted from -$1 to +1 for a 775# steer 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. Corn prices continue to lose ground. While many feeding operations have switched to wheat, the large carry in the wheat contract will cause many to switch back with new crop corn. Harvest is beginning on the southern plains. Grain elevators continue to carry large stocks of last year's corn along with an abundant wheat crop. Corn basis quotes over the September are around +35 cents in Guymon Oklahoma down from .60 over last year. Corn is now pricing into rations at $6.30 cwt. in the Oklahoma Panhandle compared to wheat at $6.00 cwt..





The concept is simple and the analysis is the same regardless of the sector of the beef industry. Beef producers are margin operators. Similar to other manufacturing businesses, you have inputs and outputs. You have fixed costs and variable costs. You have various risks associated with producing the beef but you can take protection against those risks either through hedging or the purchase of insurance. The objective, as with any business, is to margin a profit at the end of the day.


Some people manage the margin from owning cattle with a "buy and hope" strategy. While this is disparaged by many, certainly including lenders, this is not a flawed strategy. The cattle industry is full of operators who do a very good job purchasing and caring for cattle, attentive to their nutritional and medical needs, and sell their animals a competitive prices. Many of these are sound operators and over extended periods of time, manage to outperform those who protect against every risk.


Others attempt to cover every risk with a buffer to compensate them if markets or other events beyond their control impact their production cost. The fully protected mode has been under threat for the past couple of years. Cattle are purchased at market prices and all the inputs arranged under various negotiations but assuming a normal basis on the sell side, the margin comes up negative. The protected positions can operate with less capital but over time, there must come a profit.


Those operating in the live animal sector of beef production and expressing frustration at the lack of margins are now watching the beef processors who seem to have mastered the process. The processors have a much shorter time frame and the inputs and outputs are known in a matter of days. The Buy and the Sell are compressed and the expenditures in-between are well known. Many of the processors are public companies and the results are on view for the world and recently they have been very positive.


Currier Holman, the founder of IBP, was a great business guy. Not only did he innovate the fabrication of beef cuts but he initiated the movement of the beef plants away from the terminal markets and placed them where the cattle supplies were located. He and his partner Andy Anderson designed more efficient plants and they changed the industry. His philosophy of managing margins also was simple. He ran the chain as fast as possible and bought as many cattle as he possibly could squeeze through the processing plants and hoped he could make a profit. He knew his production cost were many dollars lower than the competition so in bad times, he lost less than the competition, and in good times made more. When his competitors pulled out of the cash markets because futures were down the limit, he kept buying [but of course, at lower prices].


Today's beef processors have changed. Excess processing capacities were pared back during the past few years and short cattle supplies proved some plants were unneeded. Those plant closures have left the industry with less competition and the beef companies today hold the keys to the processing portals and carefully manage the slaughter levels to assure a margin. Any analysis of the returns of the beef dollar allocated to the live sector vs. the processing and retail sectors would confirm the fact of a decline in the live sectors share of the pie.


Cattle feeders and stocker operators hope to incorporate the same control over margins in those sectors as we have seen in the processing industry. Increased cattle numbers should translate into more opportunities in the stocker and feeder sectors with the cow operators squeezed at the end of the line. Breeders have had a long period of high prices and generous margins. In the long run pushing all the price concessions back on the breeder will dry up the source of a vibrant industry. There must be a price point for breeders that allows a margin otherwise this will be a short lived cycle of herd rebuilding.






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










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. 




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.

750 # Feeder Steer1,095.83146.11
Cost of Gain 600 pounds433.600.72
Estimated Interest(Prime + 1%)29.27 
Current Breakeven1,553.35115.06
Current Futures1,459.35108.10
Net Profit / Loss-94.00-6.96


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.

750 # Feeder Steer OKC 150 days ago1,200.00160.00
Cost of Gain 600 pounds464.640.77
Estimated Interest(Prime + 1%)26.49 
Resulting Breakeven1,691.13125.27
Current Texas Panhandle Cash1,591.65117.90
Net Profit / Loss-99.48-7.37

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