October 30, 2014  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

  

PLAINS MARKET TALK

 

Corn is developing a starring role in cattle prices as pricing rally 50 cents off pre harvest lows. With a record harvest on the horizon and farmers reluctant to accept prices that crept down close to $3 on the futures and, adjusted for some horrible basises in the north, corn sometimes approached half that price in the cash markets for some areas. Corn has a direct impact of newly purchased feeder cattle and also influences target weights on fed cattle as producers attempt to maximize weight in order to reduce breakevens.

 

Opening bids of $168 were quickly refused with most cattle offered at $173. Basis bids over tops and over the soon to expire October board price were generally at $2 over for tops and $1 over futures. Packers will be bidding next week over the December futures.

 

The initial reaction to the new trading hours for cattle is positive. One flaw in the structure is the settlement price and time of settlement. The current settlement is in the pit at 1:05 pm. The settlement is due to change to a weighted average of the pit close and Globex close at 1:05 PM central in December. This leaves the trading to continue on Globex until 4 PM. CME should use the Globex close at 4 PM exclusively. 

 

With processing margins deep in the red, packers were able to move box prices sharply higher this week. While gains might fail to offer relief from red ink, they will moderate the losses. Inventories are cleaned up and retailers will be scrambling to make purchases from skimpy supplies. Choice box prices were quoted at $254 with select at $240 and the spread at $14.

 

The fall heavy runs are over and supplies will tighten into year end. Stocker and feeder cattle prices were mixed this week with feeders feeling the pressures from rising corn prices. Heavier feeder steers were in good demand and prices firm responding to an immediate need for more fed cattle. Lighter weights were soft in price. All light weight calves were higher as stocker operators build inventory for winter grazing. Receipts were down from last year and peak offerings of cattle is past and smaller offerings will keep demand good for replacement cattle.

 

Corn futures prices continued to march forward in the midst of a record corn crop. The crop is estimated to be one half harvested. Farmers are proving to be reluctant to sell this year's crop into the current price level. The corn basis in Guymon, Oklahoma is currently quoted at +$.50. Corn is now pricing into rations at $7.50 in the Oklahoma Panhandle.

 

 

TROUBLE AT THE BEEF PLANTS

 

Week before last, fed cattle prices reached $164. This slightly exceeded the all time high in some regions, but more importantly, the last time prices were this high, the box prices were $10 cwt. higher. Add to this fact a $6 rise in the live prices this past week and, as if to add insult to injury, a $2 drop in box prices on Friday. Put them all together and you have big time trouble at the beef plants. Current losses are estimated between $100-150 a head.

 

As anyone who has owned cattle knows, no one is entitled to a profit. Passing along information to buyers about the breakeven and the prices necessary for a profit, will fall on deaf ears. The best you are entitled to is a bid if the buyer happens to be interested. While sometimes losing money is part and parcel of the business in which we find ourselves, losses also can be a reflection of larger problems, and solutions not readily available.

 

Some of the problems at the beef plants are of their own making.  Cattle are in short supply and arranging supply to fill slaughter needs from mostly committed sources, ignores one critical factor. The last remaining few cattle in the open markets must be acquired to complete the needs, and if those few cattle are in strong hands then the price can be extremely volatile. Those few cattle then price all the committed cattle.

 

In an open market with no committed cattle, bids would have started at $164 then worked higher during the week with a few cattle purchased at each incremental dollar increase in price.  Pricing cattle, basis the cattle futures market, also would result in a more diversified price structure probably averaging around $167.

 

The coming year is likely to be the toughest for processing and cattle feeding. Processors will be faced with short supplies of cattle and an abundance of pork and chicken. This will make it tough to ratchet up box prices in the face of large supplies of competing meats. Cattle feeders will be faced with record breaking feeder cattle prices and a consumer who has a lid on prices they will pay for beef.

 

As they say, it will all work out in the end, but in the interim some pain will be felt by processors and feeders. As the herd expands, relief will be felt in all segments of the beef pipeline. The year end cattle inventory will likely show a larger herd than last year. Next month's cattle on feed report will likely show more cattle on feed than a year ago. And finally this time next year, the consumer will likely be paying less for beef than this year.

 

 

FEEDER MATRIX

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 Steer1,796.63239.55
Cost of Gain 600 pounds500.930.83
Estimated Interest(Prime + 1%)41.98 
Current Breakeven2,334.61172.93
Current Futures2,236.28165.65
Net Profit / Loss-98.33-7.28

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 ago1,462.50195.00
Cost of Gain 600 pounds533.290.89
Estimated Interest(Prime + 1%)30.20 
Resulting Breakeven2,025.99150.07
Current Texas Panhandle Cash2,295.00170.00
Net Profit / Loss269.0119.93

 

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