September 24, 2017. 



BOC Loan






Cash Cattle. If packers waited until after the cattle on feed report, they risk a bullish report causing feedlot sellers to price higher. This encouraged trading prior to the report release and the result was sales in the south at $108 and in the north at $170-171 dressed. Nebraska feedlots passed $108 bids and squeezed out another dollar to sell most cattle at $109 live. Prices were $2-3 higher than the previous week.


The basis was not particularly favorable for sellers with a $3 discount to the October board. There will be ongoing arguments about whether supplies of fed cattle are out there or not, but the emphasis on the basis won't be going away. If packers are able to wait out the week until late Friday, and if carcass weight rise equal to or exceed last year, then the cattle are out there. Cattle remain a perishable commodity meaning there are limits on weight and time on feed and cost of additional pounds. When those factors have reached their economic limit, times up.


The cattle on feed report was negative instead of positive surprising most traders. The placement number at 103% of prior year was 6% higher than pre-release guesses and will weigh on futures prices Monday. Placement weights were also heavy reflecting favorable grazing results from this summer and forecasting heavier weights on placement all during the heavy fall delivery period.


Cattle Futures. Futures prices moved higher in anticipation of a bullish cattle on feed report and higher cash prices. The steep price steps of the deferred live cattle contracts might get smaller in the coming week.    


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 September 9th, had steer carcass weights were up 6# at 896# which is 6# under prior year. Heifers were only 5# under last year. Carcass weights normally top in October and are weather dependent.


Forward Cattle Contracts: In an interesting development, forward contracts moved from a positive basis to futures to a negative basis to futures. Packers purchased several thousand cattle for November delivery at $1.50-2.50 under the December board.   


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 flat at week's end as packer pulled back the slaughter volumes to 637,000 in order to manage the box prices. Beef demand remains healthy and export markets are handling volumes well above last year. Margins at the beef plants are large and packers set slaughter schedules to maximize the balance between price and volume.


The choice/select spread has widened following one price point when select traded premium to choice. The fact of select selling premium to choice may spur some rethinking as processors engage their marketing skills to further divide the choice category beyond choice and Certified Angus equivalent premium products. Currently over 3/4 of all fed cattle graded choice or better. 


Beef Feature Activity Index. The past few weeks have reported increasing out front sales of beef -- likely driven by the large drop in box prices. This action is usually a precursor of 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
191.00Up $0.60
Select CutoutSelect Price Change
186.72Down $1.97
Choice/Select Spread

Replacement markets


The reluctance of many feedlots to follow the runaway October feeder board may prove insightful. Sellers testing the cash market following the release of the cattle on feed report found little to no interest from buying interest. Cash replacement prices are expected to fall this next week and continue to decline into fall.  Feedlots are beginning to fill as the industry adjusts to the much larger national cattle herd.


Calf receipts at auction barns across the country are increasing. The million head increase in the calf crop is now coming to market. In spite of steady prices this past week fueled by a runaway feeder board, calves will find a home at higher prices than last year at least now. Grazing rates are also steady to firm. All in grazing rates are around .50/lb. this year compared to .40-45 last year.


Calf buyers are able to purchase many more weaned calves this year. Weaning has become a popular way for many breeders to add value that translates into price premiums for their calf crop.  This year's rains have provided the extra forage to give adequate pasture to newly weaned calves and hold down weaning costs. Weaned calves as a percent of total calves continues to move up. The spread between a weaned and unweaned calf has reached a peak and as more calves are weaned that spread is expected to decline. Similar to most cycles, the spread move too far and now with more weaned calves and less health problems with the unweaned calves, the spread might move narrower.


Oklahoma City. Markets opened higher with larger receipts. Numbers can be expected to continue large through the next couple of months.


Feeder futures. Feeder Futures were flat in the front months but higher in the deferred as traders bet on a bullish cattle on feed report that surprised everyone with bearish numbers.  


Feeder Cattle Cash Index. The October feeder index is reported at a $7 discount to futures prices. We are approaching the heaviest marketing month for the year and seasonally the lowest feeder price point historically. It will be a hurtle for futures to pull the cash market up to the futures level when all indications are of heavy bunching of feeder deliveries into October.    


Forward cattle contracting. Pasture operators are interested in locking in a fall basis on October deliveries and feedlots are dropping the basis levels. Basis bids that were par are now lowered to $2-3 under the board for 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 prices moved higher towards week's end. Harvest has brought news of fumonisin, a plant mold on this year's corn crop in the southern plains. Test showing excess levels are attaching a $1 a bushel penalty to already low corn prices. It is unclear how contaminated corn might impact feeding programs at the nation's feedlots. Most grain locations are offering better basis bids than last year with harvest near. The current basis is 50 cents in Guymon, Oklahoma. Corn is now pricing into rations at $7.00 cwt. in the Oklahoma Panhandle.





Number of Cattle on Feed, Placements, Marketings, and Other Disappearance on
1,000+ Capacity Feedlots - United States: September 1, 2016 and 2017
                                        :          Number           :  Percent of 
                  Item                  :---------------------------:             
                                        :                       2016     :    2017     :previous year
                                        :   ---- 1,000 head ----        percent   
On feed August 1 .......................:         10,165        10,604          104     
Placed on feed during August ...........:     1,879         1,928          103     
Fed cattle marketed during August ......:  1,868         1,979          106     
Other disappearance during August ......:      41               49          120     
On feed September 1 ....................:       10,135        10,504          104     




Packer ownership of cattle and operating feedlots had several purposes. First, the idea was conceived with profits in mind. Next was the importance of a supply chain to feed into the beef plants. In the early days of commercial feeding, Cargill moved into feedlots and cattle feeding as a stand alone business. Cargill developed the first large commercial feeding operation accompanying it with a fully protected cattle, grain and interest rate futures positions. This model served them well for a couple of decades until intense competition in the feeding industry squeezed margins and Cargill exited the business last year.


Tyson relied on formula arrangements leaving the ownership of cattle and risk management to the feeders. National leaned on U.S. Premium Beef to arrange a supply chain of quality cattle conveying a ownership position to the producers allowing them to participate in plant profits. Whether the arrangements involved shared profits or premium formulas, the practice tended to squeeze cattle feeding margins and assure supply for the beef plants.


JBS purchased Swift and immediately supplemented the plant purchases with an affiliate acquisition of multiple feedyards. The one time feeding capacity of those yards is 980,000 head and they are located in Texas, Kansas, Colorado, Idaho, Arizona, and Oklahoma. JBS has announced plans to sell those yards and, once completed, this will mark the exit of all of the large packers from the cattle feeding business.


It is not difficult to understand why the packers have exited the feeding industry. Margins have been squeezed in feeding and relying on a $10-25/head profit over the course of 5-6 months might seem meager to beef plant operators who are churning out $200/head profit in a matter of a few days.


Corporate ownership and management of feedyards does not have a particularly successful history. Large companies have jumped in and out of cattle feeding sometimes with disastrous results. Feedyards lend themselves to individual management styles with some individual's finger on the purse strings. The more remote the operation is from home office, the more difficult it is to manage the thousands of daily trading transactions for cattle and grain. 


There will be little disruption to the daily purchase and sale transactions of feeder cattle by the exit of packers from the feedlots. A recent rumor of low occupancy in the Five River feedyards proved false and left speculators who had loaded up on October feeder futures with a big headache. The changes in feedlot ownership will do little to disrupt normal movements or pricing of feeder cattle. The driver for feeder prices will remain with the numbers of cattle and, witness the latest cattle on feed report, those numbers continue to build.







Below are links to articles published in the Cattle Report pertaining to industry change.


The Case for National ID for Cattle


Reforming the Futures Contract and Cash Trading of Cattle


Australia and Distributed Ledgers


Blockchains and Smart Contracts




Sections of the newsletter are redesigned with hyperlinks to the appropriate source pages. The hyperlinks are in light blue within the report.







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. 




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 Steer1,150.13153.35
Cost of Gain 600 pounds432.160.72
Estimated Interest(Prime + 1%)31.83 
Current Breakeven1,608.79119.17
Current Futures1,645.65121.90
Net Profit / Loss36.862.73


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 ago975.00130.00
Cost of Gain 600 pounds491.820.82
Estimated Interest(Prime + 1%)23.83 
Resulting Breakeven1,490.65110.42
Current Texas Panhandle Cash1,431.00106.00
Net Profit / Loss-59.65-4.42



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