March 26, 2015  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

 

  

PLAINS MARKET TALK

 

Asking prices were from $165 in the south to higher in the north. Show lists failed to expand this week leaving many to consider April fed cattle numbers may remain as small as March. The basis to the spot April contract is narrowing following a period of exceptionally large premiums for cash to futures. Historically April is a normal month for seasonal and annual tops to the cattle market. These are not normal times.

 

Fed cattle sales last week moved $2-3 higher. Prices ranged from $161 early to a high in Nebraska and Colorado of $165 late Friday. Most trades were at $163-$165. Dressed sales were from $258-260. 

 

A mid week spike upward in box prices left traders wondering whether it was an entirely forced trade following extraordinarily small slaughter volumes or had demand improved in a spring warm up. The slaughter for last week was 518,000 cattle the lowest on record for a non holiday week. This week to date is 16,000 head under that number. Box prices spurted $2-4 higher with the choice cutout at $250 and select at $246. Choice and prime now comprise 76% of the nation's fed beef supply -- a record.

 

Most feedlots made heavy purchases last week of feeder cattle, both in the spot and forward markets. The rise in prices this week mostly reflected the higher prices of late last week. A feeder market that seemed poised to lose 2 as a first number a couple weeks ago, now seems ready to sustain a $20 cwt. rally. Empty pens in many of the nation's feedyards are slowly being filled as feedlots gain more confidence in fed prices. May is expected to hold large supplies of heavy feeder cattle for placement. A 750# feeder steer was selling for $217 delivered Guymon Ok..

 

Corn prices continue to move higher. Most contracts were trading around the $4/bushel level. Corn acre plantings are estimated to be smaller this spring than last year. The corn basis in Guymon, Oklahoma is currently quoted at +$.70 over the May contract. Corn is now pricing into rations at $8.40 cwt. in the Oklahoma Panhandle.

 

HOW CURRENT ARE WE?

 

Several publications have charted the currentness of feedlots in marketing fed cattle and their analysis, supported by graphs, indicates a lack of currentness. This assessment conflicts with packer buyers who are finding very little selling pressure from cattle owners intending to market cattle each week.

 

The decision each week on the part of cattle owners starts with an evaluation of the estimated current weight of pens considered for sale on a feedlot show list. The feedlot manager assesses current cattle performance, pen conditions, and individual cattle group expectations based on history then provides a recommendation to the owner.

 

There have been several structural changes that have occurred during this past year. Corn prices have fallen from record highs during the drought years. Cattle prices reached record highs that are likely not to be seen again for years and maybe decades. The combination of these two events caused cattle feeders to seek out heavier marketing weights for fed cattle in an effort to lower breakevens. Packers welcomed the extra tonnage and encouraged this behavior by reducing and in some cases eliminating penalties for heavy carcasses. Feeding cattle to heavier weights obviously throws more cattle into heavier weight categories. When comparing weight groups of cattle to prior year, more cattle this year fall into heavier weight classifications.

 

Heavier weights do not necessarily mean the industry lacks currentness, it simply reflects a change in the intended marketing weights. If feedlots were marketing cattle at 1300# then change to 1400# or 1500#, this is intentional and does not necessarily cause cattle to be backed up. The determination of currentness is somewhat arbitrary. It can be defined as when feeders are able to market cattle at the target weight. If they are unable, then cattle are backing up.

 

Many factors impact a cattle owners choice of marketing dates. Certainly the spot and deferred futures prices influence the decision whether the owner is hedged or not. Deep discounts in the futures will encourage cattle owners to sell early. It is obvious that many normally hedged cattle owners are unhedged and not willing to be influenced by futures as much as in a normal hedge environment. Some hedged feeders have covered deeply discounted futures.

 

Show lists are also becoming less useful in determining currentness. Analysts check the carryover and compare the show list this week to prior year and last week. Looking at the show list in Texas is meaningless. A few hundred cattle more on the show list might increase offerings 25%. The decline of numbers of cattle offered in the cash markets harm our ability to evaluate the meaning of show list numbers.

 

The best evaluation of currentness is still "does the market go up or go down". The packers reaction to stubborn sellers and red ink is dark days at the beef plants and ultimately dark plants. There is always the implied threat that if sellers will not accept lower prices then packers will shut down the kill and eventually a plant. Packers like feedlots will not lose money forever. It is likely there are sufficient cattle on feed currently to support a higher slaughter rate but beef demand today is the problem.

 

FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES

 

Readers have been sending notes regarding breakeven projections. One commenter ask how we could use 80 cents for a cost of gain when everyone knows that is too low. Another ask why we are using such a high cost of gain number. The two emails illustrate the difficulty of providing one benchmark for all regions of the country. Currently a typical bases in the corn belt might be $1 under the futures and alternatively a corn basis in Hereford, Texas might be $1 over the futures. The northern feeders have much cheaper grain and more expensive feeder cattle. A more meaningful report would include one breakeven and close out for each major region. It also is difficult maintaining the tables when both fed and replacement prices are changing in $5-10 cwt. price blocks.

 

 

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 Steer1,628.63217.15
Cost of Gain 600 pounds488.050.81
Estimated Interest(Prime + 1%)38.39 
Current Breakeven2,150.26159.28
Current Futures2,054.70152.20
Net Profit / Loss-95.56-7.08

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 ago1,725.00230.00
Cost of Gain 600 pounds579.140.97
Estimated Interest(Prime + 1%)35.19 
Resulting Breakeven2,339.33173.28
Current Texas Panhandle Cash2,201.31163.06
Net Profit / Loss-138.02-10.22

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