August 4, 2015  

                    

    CATTLE MARKET REPORT AND ANALYSIS

 

  

PLAINS MARKET TALK

 

The beef plants are struggling to line up a kill and make a profit. The feedlots are deep in red ink and attempting to ratchet the cash market higher. When the stressors of the marketplace weigh on your business then all parties are looking for relief and sometime the relief comes in the form or creative transactions designed to help your bottom line.

 

Packers are pushing cash prices to fill the kill but in ways designed to not find their way to the mandatory price report. The object is to price over half their slaughter lined up in formulas. Multiple ways are popular to accomplish this objective. "Over the top" bids moved from $1.50 over to $2 over in Kansas and Nebraska. 3000 head sold for $150 in Nebraska yesterday but may not find their way to the price reporting service. Cattle sold in Kansas last week at $148 but only a few found their way into the mandatory price report. Cattle are traded and priced off the futures. Sadly after all this pricing, only 5000 cattle traded in Kansas last week leaving weekly pricing for 200,000 cattle based on the 5000 which we all assume is the bottom of the barrel.

 

Futures prices are hearing rumors of all the off the balance sheet trading and responding. Live cattle touched limit up and feeders gained $3 cwt. No one has ever questioned the short supplies of fed cattle or feeders to this point, but sustaining the rally will require box prices to respond.

 

Beef prices seemed to have found some stability however it took a rollback in the slaughter rates to get there. Some good news that retailers are planning beef features for August may allow enough demand improvement to start working off what appears to be a backlog in the feedlots. The cutout was steady at $234 for choice cuts and select at $229. The choice/select spread is currently $5. Choice cuts are now $20 under prior year.

 

Futures prices for feeder cattle guided the markets higher. Replacement cattle offerings are beginning to transition from light offerings caused by abundant available forage across the plains, to larger offerings. Stocker operators are not unaware of the dangers of the fall market burdened by bunched supplies of feeders. Prices gained $2-4 in trading at the Oklahoma City auction.

 

Calf runs are increasing across the south and southeast. Wary buyers are attempting to deal with health issues and discounts to weaned offerings of large spreads are common. Breeders are finding the cost to wean a calf on site is being well rewarded by today's marketplace. Larger ranchers who can sell weaned calves in load lots are making weaning a necessary part of their marketing plan.

 

Corn seems to have found some support and is moving higher after a big decline. Corn has fallen 50 cents a bushel in as short time but some traders believe the market has oversold. The corn basis in Guymon, Oklahoma is currently quoted at +$.60 over the September contract. Corn is now pricing into rations at $7.80 cwt. in the Oklahoma Panhandle.

 

TRANISTION TIME

 

August will be the beginning of a discovery process for many sectors of the beef industry. It is rare to find all segments of the beef industry losing money at the same time. A more traditional pattern would witness one sector operating at a profit at the expense of another sector but instead the processor, feeder, and stocker operator, are all fighting red ink.

 

The transition from short supplies of cattle to more abundant offerings will create some chaos because there exists no valid models for a rapid fire ramped up rebuilding of cattle numbers that we are likely to see in the coming months. The start will be larger supplies of feeder cattle to come this fall and this will begin to chart the course for larger supplies of beef though the next few years.

 

Forecasting how prices will react is a big job and any one believing they have this figured out will be at risk of failure. Obviously, if beef barely holds steady on a 532,000 slaughter week, there remains a lot of work to restore beef demand. Probing the elasticity of the demand curve will not be easy. Retailers will need to toy with various pricing and featuring models in supermarkets to find the right path to profitable sales. Processors will be watching the fluctuations in the dollar to find signs the beef will be an attractive value for export -- something that holds the key to rebuilding demand.

 

Feedlots suffering for several years from overcapacity will be looking to see the negative crush of feeder cost, grain cost and deferred futures moving into a correction mode. Feeder cattle supplies are expected increase eventually overwhelming a feeding capacity diminished by closed and abandoned facilities. This will create a sea change in feeding margins that have been negative by over $100 for the past month.

 

Forecasting how the herd build up will impact prices will be a big challenge. If 2014 was a banner year for the unhedged feeder, 2015 will be a quick reminder that what goes up can come down as quickly and as unexpectedly. Those doubting the markets ability to go any higher in 2014 suffered the consequences just as those who believe the market can't fall to the level of the deferred contracts this year also might find disappointment.

 

 

 

FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES

 

Readers have been sending notes regarding breakeven projections. One commenter ask how we could use 80 cents for a cost of gain when everyone knows that is too low. Another ask why we are using such a high cost of gain number. The two emails illustrate the difficulty of providing one benchmark for all regions of the country. Currently a typical bases in the corn belt might be $1 under the futures and alternatively a corn basis in Hereford, Texas might be $1 over the futures. The northern feeders have much cheaper grain and more expensive feeder cattle. A more meaningful report would include one breakeven and close out for each major region. It also is difficult maintaining the tables when both fed and replacement prices are changing in $5-10 cwt. price blocks.

 

 

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 Steer1,606.73214.23
Cost of Gain 600 pounds478.830.80
Estimated Interest(Prime + 1%)37.85 
Current Breakeven2,118.69156.94
Current Futures2,014.88149.25
Net Profit / Loss-103.81-7.69

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 ago1,590.00212.00
Cost of Gain 600 pounds544.200.91
Estimated Interest(Prime + 1%)32.52 
Resulting Breakeven2,166.72160.50
Current Texas Panhandle Cash1,957.37144.99
Net Profit / Loss-209.36-15.51

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