December 17, 2014  







A total freefall in cattle futures, cash cattle, and beef took over the markets. All contracts were locked limit down in both live and feeder cattle. This is the fourth consecutive days of limit down movement in feeder cattle and a committee at the CME was meeting to discuss expanding the limits. Bankers are nervously pressuring cattle owners to protect dwindling or evaporated or negative margins.


The downward track of cattle futures seems closely aligned with and parallels the decline in oil prices which reached $55 yesterday. This phenomena belies the important benefit to consumers of cheaper gasoline providing unexpected room in the family budget for high priced beef that is getting cheaper by the day.

The translation of both lower oil and lower cattle prices do not move immediately into the marketplace but anyone driving around can see gas prices falling on the corner of the local gas station.


Smaller show list this week will face off with smaller slaughter needs for next week. Most asking prices were at $4 over the December contract. Hedgers of newly purchased cattle were finding few buyers to take the long side of their hedges in the distant months and the futures price decline has specially hit the deferred months.


Box prices fell along with other segments of the cattle complex. Retailers are sensing an opportunity to replenish depleted inventories with much cheaper cuts. At some point they may choose to switch horses and plan beef features for the post Christmas period. Choice box prices were quoted at $243, down $3, with select at $234 and the spread at $11.


A major realignment is occurring in feeder cattle prices. Futures once again were limit down. The cash markets responded to the price correction and Oklahoma City reported prices down $8-12 cwt. on offerings of 6000 cattle. Overpricing in the feeder arena is caused by competition among too much feeding capacity and too few cattle. Many feedlots pulled out of the market awaiting further developments and watching the futures market. The feeder index remains well above futures but is falling on a parallel track. A 750# steer is selling for $218 in the southern plains.


When futures are locked limit down, some simple math can impute the trading price by using the option prices to determine the implied pricing of the futures. Traders report that options are implying another $6 drop in feeder futures. Exacerbating the downward pressures on futures are the options holders who have sold puts and need to protect the rising value by offsetting those positions with short futures. 


Corn prices are moving higher well above $4 in all trading contracts. Funds have been positioning on the long side in the grains as transportation woes plague the multicar trains of grains in-between Canada and the United States and in the U.S. between the corn belt and the southern plains. The corn basis in Guymon, Oklahoma is currently quoted at +$.40 over the March contract. Corn is now pricing into rations at $8.25 cwt. in the Oklahoma Panhandle.





Strategic Design


No one likes the position of running a business and lacking control over the primary components. The cattle rancher fears a drought because he is helpless to afford corrective action. Likewise the beef processing company is frustrated when unable to line up sufficient animals to process a complete shift in the beef plant. The feedyard manager can always keep the pens full at some price but when the purchase price results in unsustainable losses, the options available to remedy the problem are lacking.


This industry wide problem puts all participants back on the same footing -- survival and how we make it work. Borne out of the frustration of bad options is innovation. It is human nature to react to seemingly unsolvable problems with new approaches -- some will work and some will fail. The beef plants are encouraging feeders to add more pounds to the target finishing weight in an attempt to increase beef tonnage. Feedlots are responding assisted by the economic need to lower breakeven prices in a time of negative margins. Some feedlots turn to dairy calves in an effort to slow the turnover and find the ever elusive margins.


The most common change is the movement on the part of beef producers across the country to rebuild the herd. Sky high prices have results in the largest ramp up of new breeders in the history of cattle cycles. It took a long time to happen but now the evidence is everywhere to be seen and realized in the near future.


Old time economics jumps in and fills the voids felt by many sectors of the industry. A strong dollar has made the U.S. a destination for beef from Australia, New Zealand, and South America. Shortages, caused by a cow slaughter running 15% under last year, creates a need for a lot of ground beef. That same strong dollar has made our exports of beef more expensive leaving more beef available for domestic consumption.


All of these factors are attempting to bring into balance the needs of the consumer -- affordable meat. Probably the most important strategic objective of the beef industry is the desire to keep beef at the center of the plate for the consumer. Turkey burgers, chicken sandwiches, and other alternative menu offerings are the retailers and food services attempt to fill in for beef. As the herd rebounds, we want beef reclaiming lost territory on the meat counters of the country.










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.

750 # Feeder Steer1,624.50216.60
Cost of Gain 600 pounds495.530.83
Estimated Interest(Prime + 1%)38.38 
Current Breakeven2,153.52159.52
Current Futures1,993.95147.70
Net Profit / Loss-159.57-11.82


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 ago1,612.50215.00
Cost of Gain 600 pounds518.830.86
Estimated Interest(Prime + 1%)32.69 
Resulting Breakeven2,164.02160.30
Current Texas Panhandle Cash2,209.68163.68
Net Profit / Loss45.663.38


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