August 23, 2017. 

                    

 CATTLE MARKET REPORT AND ANALYSIS

  
BOC Loan

 

PLAINS MARKET TALK

 

 

 

Cash Cattle. Bids surfaced at $106 and were passed in early week trading. This morning's online auction barely has 1000 cattle on offer but will be a market test. Sales in all regions have been non existent to date this week. Show list were up across most regions as light sales volumes last week carried forward unsold cattle. Packer inventories also are likely to be smaller although don't expect them to disclose that fact. Packers pared back the slaughter rate this past week (634,000 vs. 641,000 prior week] in order to sustain box prices. They will be purchasing for the last full slaughter week before the Labor day holiday shortened week.

 

Prices were weaker this week in the north relative to the south last week. Fed supplies have been building there at a faster clip than the southern plains and are always heavier. Cattle in the south sold mainly at $110. In the north the bulk of cattle sold for $109 but the damage came in the dressed prices where prices ended at $175 or $10 lower than the previous week.

 

More poultry production is moving to less antibiotic use. This will impact production levels that are ramping up in both pork and poultry. It will be difficult to gauge production loss from less antibiotics and bird sizes as more operations change. Lower beef prices will also put pressure on both pork and poultry pricing into the fall. All meats that are reaching record levels of production compete with each other for meat features at the store and in the food service business.

 

Cattle Futures. Traders attempted to define the market summer low and August moved to the lowest priced contract and all other contract months turned premium to the August. This may be an attempt to forecast the summer low but best bet is it will be wrong. Futures attempted to find footing in this trading area and the rally will find a test today.  

 

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 August 5th, had steer carcass weights were up 2# at 880# remaining 6# under prior year. Heifers were 1# under last year. There appears to be a point when carcass weights will increase and reach last year's levels and each animal will be adding tonnage to already large supplies of beef.

 

Forward Cattle Contracts: Almost no cattle traded last week on forward basis contracts. A few dairy cattle sold forward but cattle owners were reluctant to force sales of basis trades at the current prices. 

 

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. Box prices were lower in early week trading and the choice/select narrowed to one of the smallest gaps in a long time for this time of year. Normally, the choice/select spread narrows to an annual low following year end. We are producing a lot of choice cattle and there is little differentiation between the quality grades.

 

The volume of sales out in front last week were the largest in recent history reflecting the fact retailers are willing to take on more inventory at lower prices. This is generally a precursor of beef features. The margins for processing are continuing large and this will encourage continuing large slaughter volumes of cattle at the beef plants.

 

Beef Feature Activity Index. There is nothing more important than beef features across the country. The regularity and emphasis on "beef specials" are the drivers of improved beef demand. It is not secret that retailers run beef features when margins are good and they have purchased beef lower. Beef specials serve as drawing cards into the stores and are profit centers. This new link provides perspective on the level of feature activity week by week in the country.

 

 

Choice CutoutChoice Price Change
193.03Down $0.06
Select CutoutSelect Price Change
190.89Down $0.73
Choice/Select Spread
2.14

Replacement markets

 

Our friends at the daily livestock report reminded us of price action for the past two years in feeder cattle. Last year prices of feeder cattle dropped $20 cwt. from the end of August to the end of September. In 2015 they fell $25 cwt.. Feeder prices are near last year's level as we approach September but supplies will be heavier this year for both stocker and feeder cattle. Replacement cattle cost ended last week mirroring the fed market -- in steep decline. This week prices have moderated.

 

Many areas for winter grain planting received generous rains and field preparation is beginning. Ranchers are also weaning and purchasing light stocker cattle for winter grazing programs. Weaned calves will find abundant forage until fall and placement weights on pasture are likely to be heavier this year. Gains for yearlings awaiting fall delivery also have been good.

 

Placements that have been running at mostly double digit gains over last year will pare back to less burdensome increases starting in July. This doesn't reflect less cattle in the country but placements will now be benchmarked against larger placements periods last year. It will become increasingly important to view monthly placement figures in the context of 5 year averages.

 

Oklahoma City. Stocker and feeder cattle receipts were light on Monday and prices firmed. Receipts at auctions in Oklahoma will be light this month and increasing into the fall.

 

Feeder futures. Feeder futures reversed course and posted a $3 rally.   

 

Feeder Cattle Cash Index. Attention will be tracking the relationship between the index and falling cash prices leading into the fall months. We are approaching the heaviest marketing months for the year and the direction of price will be down with the feeder index lagging the cash and sometimes futures contracts.    

 

Forward cattle contracting. Some feedlots are looking at fall prices and making some basis purchases. Prices were mostly $1-2 discount for October 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 moved lower in early week trading. Both weather and a favorable crop estimate are influencing the movement down. The basis traded steady but is expected to narrow into harvest. The current basis is 45 cents in Guymon, Oklahoma. Corn is now pricing into rations at $7.10 cwt. in the Oklahoma Panhandle.

 

 

STRAIGHT TO THE BOTTOM LINE

 

Trend lines mark the progression of price points in a graph form. They are helpful both for reviewing history and for planning for the future. Two critically important trend lines are particularly relevant as we move towards year end. The first comes in several varieties although the direction is the same for all. This is a price trend line. It doesn't really matter whether you are selling calves, yearlings, or fed cattle, the price trend line is down. This past week the price trend line, that reached a high for fed cattle of $146 early this year, took a big spike down and all of the loss went straight to the bottom line.

 

The second critical trend line is the projected breakeven of cattle in inventory that will be marketed by year end. The breakevens for both fed and stocker cattle is moving higher with each week through year end. In the feedlots many of the breakevens will be reaching the $120s soon. Yearling breakevens for cattle grazing summer pastures will be in the $140s and $150s.

 

For some, if not many, this year's price decline is differentiated from last year with more operations having some hedge protection for price declines. As always is the case, the coverage varies from operation to operation. Many of the hedged operators, have suffered some hedge losses during the past few months. Some have already covered hedges thinking the summer low has been reported. The sweet premiums of feedlot cash sales over futures is mostly gone and replaced now with more traditional basis levels.

 

The current view of the market prices expressed by the futures market may not be gloom and doom but certainly doesn't forecast a return to the $120s anytime soon. In the feeder classes, spring feeder prices are forecast lower than this fall -- an unusual perspective with little historic support. With lower replacement cattle prices forecast for next spring and a bumper calf crop, we might expect much lower calf prices this fall. This year's replacement prices have maintained premiums over last year but with this year's growing calf crop, that might change this fall.

 

A break below last fall's prices for calves will have repercussions for breeders. The cow slaughter this year has stayed consistently 10% and more higher than last year. If calf prices continue downward, expect more cow culling this fall and a likely end to expansion of the nation's cow herd. The growth has already slowed and will slow further or stop depending on the extent of a price decline this fall.

 

The market is searching for a sustainable price level allowing all sectors to make a living. This will likely require more slaughter capacity to fairly apportion operating margins among the various beef production sectors. It also will need a better functioning futures contract. The current contract is flawed and requires a contract with a transparent cash market to attract new speculative traders into the market. The contract must be cash settled for those traders to enter the market. Finally, consumers preferences must to delivered to the meat counter matching price and quality points with production specifications.

 

 

 

 

 

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 Steer1,059.60141.28
Cost of Gain 600 pounds462.400.77
Estimated Interest(Prime + 1%)30.12 
Current Breakeven1,546.42114.55
Current Futures1,501.61111.23
Net Profit / Loss-44.82-3.32

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 ago975.00130.00
Cost of Gain 600 pounds481.340.80
Estimated Interest(Prime + 1%)23.73 
Resulting Breakeven1,480.07109.63
Current Texas Panhandle Cash1,481.63109.75
Net Profit / Loss1.550.12

 

 

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