March 27, 2016. 

                    

 CATTLE MARKET REPORT AND ANALYSIS

  
BOC Loan

 

PLAINS MARKET TALK

 

 

Cash Cattle. Packers continued to add to inventory late Friday causing cattle in Nebraska to bring $134-135 and in Kansas $132 with the bulk from $130-131. Dressed prices in the north were from $212-215. The volumes were large in all regions although some of the lower priced purchases were for 15-30 day delivery.

 

Some packers have asked to pull forward purchases made for the April period into this week's slaughter. Several weeks of purchases, where out front sales have been large, have positioned packers to use those purchases to cushion future procurement needs. Offsetting that inventory is the size of the slaughter that has been working higher. Packers will be assessing the size of this week's show list in order to determine their needs for next week.

 

The political fallout from the failed health care bill moved to financial and commodity markets Monday. The Dow extended an eight day string of losses. Some trader are now questioning Trump's ability to push legislation through the Congress. Positive for the beef business is a steep recent fall in the value of the dollar making our exports much cheaper and encouraging more beef purchases from abroad. The market has witnessed sell offs in livestock, especially lean hogs, the grains, energy and metals.

 

The big news this past week was the size of the slaughter at 613,000 head. Packers margins are good and they were busy making hay while the sun shines. The size of the kill came without crashing the boxed beef market or at least so far. The increased slaughter number, well above the 538,000 slaughter last year will keep packers busy replenishing inventory. It may have a negative impact on the boxed beef market but without a large drop in box prices, usage of cattle will stay healthy for all parties up and down the beef chain. The cattle on feed report also confirmed the healthy state of beef demand and when adjusted for one business less this year, represents an increase of over 7% more cattle slaughtered this year with a resulting box price not much changed from prior year.

 

Cattle Futures. Futures prices were mixed in late week trading. The spot April contract is transitioning into the delivery month and lagging the cash by $10-14 depending on what region you select. June live cattle gained ground on the April this past week. The steep staircase down for fed prices reflected in futures pricing may be more dramatic than fundamentals would dictate. The slaughter rate in the coming weeks will determine how well we can manage larger supplies.

 

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 March 11th, had steer carcass weights moving 5# higher to 881# remaining 15# under prior year. Heifers were 13# under last year. 

 

Forward Cattle Contracts: Most activity in the forward sales has been in the 15-30 day group where large volumes of cattle have traded each week. The past few weeks have featured from 30-50% of the weekly volume in this forward pricing group but many of those trades are mixed into the spot prices under mandatory price reporting. The focus in this week's report was on the May cattle basis the June board. Early May cattle traded $+8 to the June board with late May at $+6.

     

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. The cutout is toppy both seasonally and fundamentally. Larger supplies of cattle are ahead with the prospect of lower prices for retailers. The market for cuts has been strong fueled by healthy demand for the trim. Much of the Brazilian export market was ground beef and some of that business may be diverted to the U.S..

 

The cattle inventory report released the end of January showed more heifers held for breeding. Nonetheless, heifers are also increasing in feedyard placement. 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 continuing but slowing. 

 

 

 


 
Choice CutoutChoice Price Change
219.91Down $1.71
 
Select CutoutSelect Price Change
213.62Down $1.93
 

 

 

 

 

 

 

 

Replacement markets

 

Buyers were turning cautious as many have pushed numbers of purchased cattle during the past two weeks. Many buyers are sensing a market top on feeder cattle. Movement in the country will slow during April and then expand for May. 

 

One recent change in the structure of the replacement market is the basis. February witnessed historically large basis premiums for yearlings. As futures have run up from the low $120s to the mid $130s the basis offers on replacement cattle has declined. Basis trades for spring feeder cattle are returning to a more normalized level based on history.

 

Oklahoma City. Prices were $1-3 higher as demand is good for replacement cattle of all classes. Demand for summer grazing will peak during the next 45 days.

 

Mid week sale at OKC-West  were $3-6 higher as the market structure supports higher replacement values.

 

Feeder futures. Feeder futures have posted $5 gains this past week and allowed margins for some stocker operations.                    

 

Feeder Cattle Cash Index. The index will converge with the futures next week.           

 

Forward cattle contracting. Pens in many of the feedlots are beginning to fill as the spring run of feeder cattle off winter grain fields come to market. The aggressive posture for spring forward contracts is mostly concluded with interest developing for the summer month placements.  Prices were mostly par to $2 discount to the board for summer on 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. Corn and wheat posted losses for the past week as rains cross the plains and prepare land with moisture for summer crops. Corn basis quotes are 30 cents over May in Guymon, Oklahoma. Corn is now pricing into rations at $6.75 cwt. in the Oklahoma Panhandle.

 

BRAZILIAN MEAT SCANDAL UPDATE

 

One week following the raids on Brazilian meat plants, more normalized operations are returning to the industry. Meat bans placed on Brazilian meats by various countries have been mostly removed and purchases renewed. The focus is now on the 21 meat plants targeted for selling tainted meat. Most countries have prohibited purchases from those 21 plants. Some countries, with extremely finicky consumers when food safety issues surface, will remain reluctant consumers.

 

CATTLE ON FEED

 

Friday's cattle on feed report offered very little in the way of surprises. All categories were well with premarket guesses by industry observers. There is expected to be little reaction in the futures on Monday.

 

Number of Cattle on Feed, Placements, Marketings, and Other Disappearance on
1,000+ Capacity Feedlots - United States: March 1, 2016 and 2017
-----------------------------------------------------------------------------------
                                        :          Number           :  Percent of  
                  Item                  :---------------------------:              
                                        :    2016     :    2017     :previous year 
-----------------------------------------------------------------------------------
                                        :   ---- 1,000 head ----        percent    
                                        :                                          
On feed February 1 .....................:   10,709        10,782          101      
Placed on feed during February .........:    1,710         1,694           99      
Fed cattle marketed during February ....:    1,591         1,648          104      
Other disappearance during February ....:       58            56           97      
On feed March 1 ........................:   10,770        10,772          100      
-----------------------------------------------------------------------------------

 

 

THE MANY FLAWS OF MANDATORY PRICE REPORTING  

 

There is little disagreement regarding the purpose of USDA Mandatory Price Reporting. The mission is stated as follows:

 

The purpose of the program is to provide marketing information for cattle, swine, lamb, and livestock products that can be readily understood and utilized by producers. Livestock Mandatory Reporting encourages competition in the marketplace by vastly improving price and supply data, bringing transparency, breadth and depth to market reporting. The program gets its authority through the Livestock Mandatory Reporting Act of 1999, which must be reauthorized by Congress every five years.

 

The point of departure is the delivery of this mission. The program was established to benefit beef producers – not beef processors. Beef packers have learned to work with the system and work the system. A daily look at the various reports leaves mostly misinformation and confusion among producers. Packers know the market. They test it every day. They know when they miss a pen of cattle for 30 days forward because a competitor bid $126 and they bid $125. They know when they miss a pen for next week because they offered $133 and someone gave $134. They know when they bid +$8 basis for a pen to deliver in May and topped a competitor who had offered +$6 basis to the June live cattle contract. Producers aren’t so lucky.

 

These reporting facts and protocols are swallowed up in strictly regimented rules governing the reporting platform that has failed to adopt to changing times.

 

Spot market. The industry defines the spot market for fed cattle as those cattle purchased this week for next week’s delivery. USDA allows many of the cattle purchased in the 15-30 time frame to be reported in the daily cash reports. There frequently, as is the case today, can be dollars difference in the prices. The beef producers see no differentiation between the $126 price for forward cattle and the $133 price for next week. They can only guess or rely on word of mouth about the sales prices.

 

Over the tops. Packers will purchase some cattle at .5-$2.00 over the top reported price for a region. These cattle never find their way into the spot sales reports because they are designated as “formula sales”. The reality is they are every bit as relevant as the other cash sales and need to be reported as spot sales.

 

Formula sales.  This is a broad category of sales that makes up half the weekly sales volumes. Included in this grouping would be negotiated grid sales, over the tops, cattle committed to a plant with base from cash sales, and other types of trades that are derivative in nature. These transactions should all be converted to a live FOB price at the feedyards and placed into the proper sales week. Currently, results on formula sales lag the spot market by one week.

 

Basis Trades. Basis trades can occur for any period in time. Cattle owners can sell in the spot market basis the spot futures month and price during the week prior to slaughter. They also can select forward weekly periods leading up to the spot month. Finally, they can forward sell cattle into months and off months basis the appropriate futures contract. Currently, flat priced forward cattle contracts are thrown into basis reports and shown as PAR – a totally incorrect classification that distorts and confuses the market. Additionally, there is no distinction between dairy and beef cattle on the basis reports which is wrong.

 

Referential point for the CME live cattle contract. The live cattle contract has been robbed of liquidity due to the fact many traders will not use the contract because they cannot understand the underlying market or how it works or is reported. Instead of being a catalyst for clarity, it is a source of confusion.

 

Correcting the flaws of Mandatory Price Reporting requires guidance and support from the industry. There is little impetus from sellers because most sellers think they are getting over the market. They fail to understand they are getting the market but it is not reported or not reported properly. There is little interest in change from packers because they think they are constructing the purchases in a way that controls the reporting. Traders who avoid the cattle futures because they can’t see or understand the underlying market, moved on to trade other commodities. This leaves only the 25% of the cattle owners who trade in the cash market to complain. The 75% are ignoring the simple fact that better reporting using modern technologies like block chains, benefits everyone. You may have cattle that are better than average but how do your prices compare to another producer with similar cattle selling cattle at another beef plant. Transparency is a cornerstone of healthy competition.

 

We welcome your comments on additional thoughts on mandatory price reporting.

 

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 Steer991.13132.15
Cost of Gain 600 pounds424.010.71
Estimated Interest(Prime + 1%)28.07 
Current Breakeven1,437.98106.52
Current Futures1,435.73106.35
Net Profit / Loss-2.26-0.17

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 ago1,035.00138.00
Cost of Gain 600 pounds439.330.73
Estimated Interest(Prime + 1%)24.49 
Resulting Breakeven1,498.82111.02
Current Texas Panhandle Cash1,720.31127.43
Net Profit / Loss221.4816.41

 

 

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