June 25, 2017. 

                    

 CATTLE MARKET REPORT AND ANALYSIS

  
BOC Loan

 

PLAINS MARKET TALK

 

 

CATTLE ON FEED

 

                        U.S. CATTLE ON FEED ESTIMATES
                   IN YARDS WITH MORE THAN 1,000 CAPACITY
 
                                                  AVERAGE            RANGE
                                   ACTUAL       OF ESTIMATES     OF ESTIMATES
CATTLE ON FEED           June           103            102.2      101.7-103.0
PLACED DURING             May           112            110.1      106.5-114.0
MARKETED DURING           May           109            108.8      108.1-111.0
 
 

 

The pre-report estimates of 110% for placements was bearish and the actual number of 112% represent an ongoing and continuing build up of cattle on feed. 

 

 

Cash Cattle. While the bulk of last week's sales were $122-123 live and $195-196 dressed, the sales trailed off lower as the week progressed closing near $120 live and $193 dressed. The stair-step downward continued all last week. There is little relief on the horizon as carryovers continue and purchases this week for a holiday shortened slaughter. The market has now moved from $137 to $119 in two short weeks and most of the decline in prices captured in the hands of the processors.

 

Foreign trade in beef has worked in favor of beef price stability. USDA placed a ban on imported beef from Brazil and while that will not stop imports from other countries, it might slow them down. The value of the dollar has fallen and is constructive for our beef exports and developing volumes of sales to China will be key to the future of our beef markets. The bottleneck in exports to China remains the strict requirements on our beef to qualify for export. Currently only a small percentage of our beef will meet the specifications necessary for export. Meanwhile our NCBA, our largest cattle organization, has policy on the books opposing mandatory identification of the nation's cattle herd. Some find it hard to believe that the largest obstacle to increasing beef exports is ourselves.

 

Cattle Futures. Futures rallied on the news of a ban on the import of Brazilian beef. That event alone is unlikely to move the markets but China exports could. Cash prices have moved quickly downward to close to futures prices that are now more closely tracking the current cash prices. Convergence is upon us. 

 

Carcass weights are released each Thursday and are a closely watched barometer indicating the position of cattle feeders in the nation's feedlots. The last report released for the week of June 10th, had steer carcass weights were up flat at 847# remaining 17# under prior year. Heifers were 14# under last year. 

 

Forward Cattle Contracts: Packers interest in forward purchases has slowed. Purchases continue to be misreported by USDA as to delivery period and basis status. The errors consist of placing 15-30 sales in the spot market sales, and reporting flat price forward sales as a Par basis sales.

 

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 direction in the beef cutout is down. Demand for beef remains good. The main development in prices is a narrowing of the choice/select spread along with a sell off in the composite. This is the first weakness seen in the cutout with more anticipated in the coming weeks.

 

 

 

Choice CutoutChoice Price Change
239.75Down $3.13
Select CutoutSelect Price Change
216.72Down $0.20
Choice/Select Spread
23.03

Replacement markets

 

Replacement cattle prices joined the drop in fed prices. A brief rally in feeder futures at week's end is likely to be temporary as traders focus on continuing large placement numbers. Cooler weather, moisture, and crashing prices are all likely to slow down placements of cattle on feed in July.

 

Disbursing almost 1 million head of feeding capacity is a big job. It is unlikely to easily find one buyer with so many properties in so many locations -- some integrated with beef plants. The entry of some large multi-national is possible or domestic corporate interest but recent forays into feeding by corporations has not been judged successful. The feedyards as a whole are good properties and should bring a good price. Equally important will be how the sale of the feedyards will impact the ongoing feeder market and market competitiveness. While Five Rivers continues to buy in the replacement market, one might suspect there might be a slowing down. The feedyards are all large efficient facilities and it is doubtful they will not find earnest buyers. Assuming multiple buyers, it is unlikely to change the landscape in the replacement market.

 

Oklahoma City. Prices continued to fall each day as feeder cattle are finding less than robust demand. Early week losses of $3-5 have turned into $5-10 losses. Receipts at auctions in Oklahoma will trend downward into the summer months.  

 

Feeder futures. The late week rally in feeder futures is likely to be short lived following the monthly cattle on feed report. Premiums in the deferred months have disappeared with most traders anticipating more declines if fed cattle prices continue to lose ground.

 

Feeder Cattle Cash Index. The futures are now leading the cash market lower and the feeder index is following.   

 

Forward cattle contracting. The only activity in forward contracts was for summer periods. Feedlots were not pushing to buy cattle either forward or current. Prices were mostly par for August 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. Cooler temperatures and moisture are helping along the crop progress and softening the futures prices. This will not only help towards crop development but also will motivate farmers to empty the bins of old crop corn. The basis firmed slightly in recent trading to 50 cents in Guymon, Oklahoma. Corn is now pricing into rations at $7.50 cwt. in the Oklahoma Panhandle.

 

GMOs and Syngenta

 

A Kansas jury on Friday awarded $218 million dollars to 7,000 corn growers in Kansas. The lawsuit was based on Syngenta's Viptera GMO corn seed and expectations that the resulting product would be accepted into China's domestic market by the time the crops were harvested in 2011. This lawsuit is the first of tens of thousands of lawsuits against Syngenta brought by farmers claiming Syngenta knew the product's clearance for use in China might be problematic.

 

Certainly, if Syngenta marketed Viptera with the representation farmers could sell their corn to China, it should be held liable for breach of contract. If the representations from Syngenta were they "hope" clearance would happen, then farmers take that risk and should suffer the consequences. Reliance and representations on the actions of a foreign government are uncommon in mainstream ag businesses. No prudent operator would warrant sale of a domestic ag product to a foreign country because they have no control over the process. The lawsuit is joined by thousands of farmers who never bought the product but claim harm to the corn market because GMO corn was comingled with domestic corn tainting the sale of both.

 

GMO products have become a political football both as a proxy for obstruction in foreign trade and as an obstacle to scientific crop improvements. There exists no science supporting a risk from GMO crops other than the risks of hybrids developed in the field or in the lab that occur naturally. GMO development speeds innovation and encourages quick adoption by farmers squeezed by low crop prices.

 

ROLLING OVER

 

The change in bargaining strength can come quickly and dramatically as the past two weeks have demonstrated. Movement from price leverage on the side of the cattle owner has quickly changed to packer control and processing margins that are at all-time highs. Trades at $137 have been eclipsed and replaced by sales under $120 in two short weeks. While it might be easy to blame the quick decline on weak sellers, the more likely culprit is building supplies.

 

Rolling over is as much a state of mind as a statement of the balance between supply and demand. Packer spin about the lack of need for more inventory and filled slaughter slots are common. Some is just spin and some is a changing landscape that involves more supplies and limited slaughter capacity. The facts are supportive of the notion that most of the recent price decline has found a home in the pocketbooks of the processors.

 

Two open questions remain. How long will this newly found buy side bargaining strength last and will the same rate of decline continue?  The answer to the first question is it will last so long as the packers manage the kill size to keep the supply side on the defensive. The answer to the second depends on the resolve of the sellers. The sellers can stop the decline anytime just by saying NO. This, of course, risks a backup of numbers and more trouble down the line.  

 

Looming in the backdrop of the current situation are some extraordinary influences: the JBS Bribery scandal and the opening of the Chinese markets to U.S. beef. Chinese demand for beef is swelling. In the past four years, imports of beef have increased nine-fold, reaching 601,000 MT in 2016. This may only be the start and an emerging middle class, anxious for more beef in their diets, may be a catalyst for increased demand for U.S. beef and a balance to increasing supplies.

 

The future of the world’s largest meatpacker remains unclear. Political wrangling in Brazil has pitted the Batista family against an embattled President whose focus of recent is mainly towards revenge. JBS has stated a desire to concentrate future emphasis on the U.S. operations -- the centerpiece of their meat empire. Meanwhile, they are disgorging almost a million head of feeding capacity and no buyers have been announced. Rumors of U.S. plant closings are fiction. Plants will stay open so long as processors are making $200/head.

 

The future for prices for domestic cattle is not good in the near term. Nonetheless, there remain opportunities and foremost is a place for more processing capacity. More processing capacity would restore a more sharing balance in beef margins between processors and live producers. Taking the mothballs off some of the recently closed plants might make sense. Alternatively, making use of new technologies for processing beef with magnetic imaging and robotic cutting devices might create new opportunities for business disrupters. Increased competition is always possible anytime one sector in beef production gains too much leverage.    

 

 

 

Click on the links below to find out all about how Australia plans to use Blockchains and Smart Contracts:

 

Australia and Distributed Ledgers

 

Blockchains and Smart Contracts

 

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 Steer1,089.60145.28
Cost of Gain 600 pounds482.930.80
Estimated Interest(Prime + 1%)31.06 
Current Breakeven1,597.64118.34
Current Futures1,526.18113.05
Net Profit / Loss-71.46-5.29

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 ago990.00132.00
Cost of Gain 600 pounds459.230.77
Estimated Interest(Prime + 1%)23.81 
Resulting Breakeven1,473.04109.11
Current Texas Panhandle Cash1,771.47131.22
Net Profit / Loss298.4322.11

 

 

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