November 28, 2015  







A winter storm interfered with trading with some feedyards unwilling to accept steady money and the market at a standstill. Snow, rain, and ice crossed the plains with an almost certain impediment to cattle performance. The storm also impacted this week's holiday shortened slaughter by further reducing it as a couple of plants on the southern plains cancelled the A shift. The small volume in the north of trades at $123-125 live and $195 dressed will leave packers short of next week's slaughter needs and cattle owner with storm stressed cattle they may or may not market.


The largest drag on beef sales has been the grind. The cold storage report released this week posted one of the largest inventories of ground beef in storage for recent years. Most ground beef blends are selling 50-75% under last year and continue to represent a large portion of beef sales. Margins should be good for retailers and the timing good for a turn to beef. Both choice and select cuts gained late week. The choice cut was quoted at $204 and select lower at $195 leaving the spread at $9. 


The feeder index has been falling in dollar multiples as cash prices tumble for replacement cattle across the country. Most auction barns will be closed this week. Oklahoma City was the exception and trading was active with demand good and prices up to $5 higher. Trading in yearling cattle is drawing to a halt for the year as most replacement cattle hold off marketing plans until after year end. Feedlots sitting with empty pens need cattle but with lousy margins and oversized losses on current close outs, there is little optimism. 


Corn futures fell in late week trading. The corn basis is remaining flat in most regions. Corn remains in a trading range between $3.50 and $4.00 a bushel. The corn basis in Guymon, Oklahoma is currently quoted at +$.40 over the December contract. Corn is now pricing into rations at $7.15 cwt. in the Oklahoma Panhandle.






Time was when fed cattle traded every day. Bid ask spreads were .50 apart and a big move in the market was $1 in a week. Cattle traded live weight at the feedyard and were weighed at daylight with a 4% shrink. In the 1960s a futures market in live cattle was created to track that market and provide a risk vehicle for producers, processors and retailers and attract the speculators so necessary to any successful futures market.


That day is long gone and in its place is a futures market looking for a cash market and unable to find it because it isn't there. The dictionary defines "mirage" as something that appears real but isn't. We all know the reality of a mirage in the desert where images of water in the distance disappear as we approach. The same phenomena is at work today in the live cattle contract when participants are looking for a cash market and can't find it. They can feel it but can't find it. Therefore, volatility is the result.


The reason they can't find it is because it doesn't exist. The reported cash transactions comprise less than 5% of the thousands of trades executed every week but unavailable to a transparent look at the market. The culprit is not HFT [high frequency trading], it is the mismatch between a outmoded live cattle contract and the current cash market where over 75% of all weekly transactions are traded on a dressed basis.


The dysfunctional live cattle contract is not the only problem. USDA has a reporting system that has failed to keep up with the times. As methods and protocols changed for trading fed cattle, mandatory price reporting stayed the same leaving the reports today without any material content. That can be changed by rule making and the newly Congressionally approved mandate need to insist on a major reworking of the rules to define spot sales, forward sales, basis sales and negotiated grids in a meaningful reportable form.


Finally CME owes the industry the responsibility of opening trading for a new YG3 Choice dressed cattle contract. The industry owes the CME the support for a new contract to begin trading side by side with the old contract leaving traders a path to exit the old contract and move into the new one.






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.




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 Steer1,307.93174.39
Cost of Gain 600 pounds475.930.79
Estimated Interest(Prime + 1%)31.66 
Current Breakeven1,810.82134.14
Current Futures1,689.53125.15
Net Profit / Loss-121.30-8.99


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 ago1,740.00232.00
Cost of Gain 600 pounds523.500.87
Estimated Interest(Prime + 1%)34.96 
Resulting Breakeven2,298.46170.26
Current Texas Panhandle Cash1,713.69126.94
Net Profit / Loss-584.77-43.32

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