PLAINS MARKET TALK
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.
are released each Thursday and will be a closely watched barometer
indicating the position of cattle feeders in the nation's feedlots. The last
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.
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 Cutout||Choice Price Change
|Select Cutout||Select Price Change
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.
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
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..
ALL IN OR HOW TO MANAGE MARGINS
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.
NOTE TO READERS
Sections of the newsletter are redesigned with hyperlinks
to the appropriate source pages. The hyperlinks are in light blue within the
FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE
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
|750 # Feeder Steer||1,095.83||146.11
|Cost of Gain 600 pounds||433.60||0.72
|Estimated Interest(Prime + 1%)||29.27||
|Net Profit / Loss||-94.00||-6.96
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.
|750 # Feeder Steer OKC 150 days ago||1,200.00||160.00
|Cost of Gain 600 pounds||464.64||0.77
|Estimated Interest(Prime + 1%)||26.49||
|Current Texas Panhandle Cash||1,591.65||117.90
|Net Profit / Loss||-99.48||-7.37
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