November 20, 2019  

                              

CATTLE MARKET REPORT AND ANALYSIS

  

 

PLAINS MARKET TALK

 

 

Cash Cattle

 

The early losses in live cattle futures failed to weaken sellers who are asking higher prices. Tyson announced plans to begin slaughter at their Kansas plant the first week in December and the purchases for that week will begin next week. Faced with smaller show lists, packers began to purchase a few cattle in the north at steady to firm prices. A few cattle in Iowa and Nebraska sold for $116-116.50 Tuesday followed by several pens selling in Kansas and Nebraska for $115-116 on the online fed cattle auction today-- $1 higher than last week.

 

Trade talk can not leave the news and with the deadline of December 15 for more tariffs, coming up, there will be developments positive or negative soon. The value of the ag purchases is being distorted in relevance to the marketplace. It is being felt every day in the market as the 90% lean beef has jumped pulling up the value of chucks and rounds. These are not direct purchases from China but are indirect benefits from reduced imports from other countries and some beef moving into China through Vietnam and Hong Kong. On the pork side, ham prices have doubled. In poultry we are once again approved for export of poultry to China and they remain the best buyer for chicken feet. Talk is cheap in the world of trade news, but actually tracking the volumes of products exported and the price points is at the core of improved demand from abroad and any student of economics can observe the recent rise in global demand for meat.

 

Cattle Futures. Futures rallied into the close as it became obvious cattle owners were not going to cave into lower prices this week. Realigning cattle flows to a more normalized slaughter is now on the horizon and cattle owners will welcome a more competitive environment hoping to capture some of the enormous margins at the beef plants.

 

The Comprehensive Fed Cattle Weekly Report offers the most current information on the current status of fed cattle being harvested. The report is published each Tuesday and includes the previous week's change in carcass weights and quality grading. The latest report shows carcass weights up 5# at 887# which remains 12# over last year. This is the second 5# increase in a row when seasonally weights should be dropping. Quality grade grading increased .2% from prior week.  The improvement in grading is now running over last year.

 

Forward Cattle Contracts:  The volume of forward sales were moderate in all months. Plains sales in February/March/April were mostly at par the matching board price. Much larger premiums were posted in the northwest region [$6-8].

 

Weekly graphs on the Comprehensive Weekly Fed Cattle Report break down the categories of trade for the week according to 1) formula cattle; 2) negotiated live; 3) negotiated dressed; 4) and forward contracts. Some cattle included in the formula category are week to week negotiated grids and not committed cattle to one plant. Other cattle designated as formula are "over the tops".

 

The Cutout. Box beef prices were flat. A restricted import level of 90% lean beef has propped up the lean prices and supported the overall cutout value. The choice/select spread moved back to $23.

 

Beef Feature Activity Index. This is the beginning of preparations for the holiday season and the middle meats are attracting the attention of retail and food service operators. Ribs are working higher, but a rally in 90% lean is bringing along the end meats.

 

Cutout Values as of Tuesday, November 19, 2019
Choice CutoutChoice Price Change
239.01Down $0.11
Select CutoutSelect Price Change
215.47Down $0.12
Choice/Select Spread
23.54
 

 

Replacement markets

 

Peak runs of cattle off summer grazing locations are past and the condition of replacement cattle is changing. The sourcing of green cattle straight off pastures is turning into mixed offerings including cattle that have been either fed in a grow yard or on pasture. Sale barn fleshy weaner calves are getting harder and the high season for animal health problems is subsiding and more weaned calves will be on offer and the unweaned ones will be easier to manage.

 

The condition of winter grazing areas is generally not as good as last year but cattle are being turned out every day. Operators will be watching the cattle inventory on January 1st to size up the prospects for spring prices for replacement cattle. Buyers are more sensitive to all factors impacting performance. Brokers who traditionally mentioned weight, quality and flesh are now including implant type, supplemental feed, vaccination regime and more.

 

Oklahoma City. Feeder cattle were lower and calves higher. 

 

Feeder Cattle Futures. Feeder contracts were weaker.  

 

Feeder Cattle Cash Index. The index reflects the calculations from the cash markets established to settle futures contracts. 

 

Forward cattle contracting. Inventory price levels of pasture cattle are favorable to stocker operators and some will forward sell with other waiting for a spring rally. Bids are $2-3 under the board for 800# steers delivered to the Texas Panhandle.       

 

National Weekly Feeder Summary released on Friday of each week tracks the national prices by region for last week.   

 

Grain Futures. Corn prices were higher. There is uncertainty about the the final size of this year's crop because there is a lot of late harvested corn just as there was a lot of late planted corn. The corn basis is moving higher at 60 over the December board in Guymon, Oklahoma. Corn is now pricing into ration at $7.75 cwt. in the Oklahoma Panhandle.

 

PRE-RELEASE GUESSES ON THE COF REPORT

 

U.S. CATTLE ON FEED ESTIMATES
                   IN YARDS WITH MORE THAN 1,000 CAPACITY
 
                                                  AVERAGE            RANGE
                                   ACTUAL       OF ESTIMATES     OF ESTIMATES
CATTLE ON FEED       November                          101.3       98.2-102.5
PLACED DURING         October                          112.2       96.2-119.0
MARKETED DURING       October                           99.6       99.3-100.1

 

 

 

FLASH TRADING

Several years ago, complaints were lodged with the CME regarding unfair access granted to some traders for order flow. Traders in many remote locations complained their bandwidth would not allow their orders to hit the exchange server with the speed of other orders placed from higher bandwidth or closer proximity to the CME trade platform. It is a impossibility to assure all trader’s orders the same timing to the server and the issue died as people realized this basic fact.

 

The end of the bandwidth controversy did not end the practice of flash trading or opportunist trading on market moving information. Many automated programs are linked to market time sensitive news releases in an effort to beat the crowd to the market and capitalize on a front running position. There is nothing illegal occurring, only algorithms designed to automate the process of reading a news release and turning the results into an instantaneous order on the exchanges.

 

The best example is the release of USDA grain stocks reports at 11 am while grain futures are trading. It is not unusual to find futures up or down the limit following the report and sometimes both in the remaining time before the close. Market sensitive information is parsed quickly and frequently inaccurately. Traders might key off one matrix like crop yields or stock carryovers. It is not unusual for other data within the report to conflict with the single targeted data. Therefore, flash trades are sometimes wrong, and traders are locked into a large losing position.

 

The Chinese trade wars have provided plentiful ammunition for flash trades. Regular news releases by both sides can be parsed for market moving relevance triggering market orders up on down on the exchanges. In a world, where as much of the negotiations occur through the media as behind closed doors, flash trades jump in and out of the CME ag contracts at a moment’s whim. The probability of success for this type trading is far from reliable.  Head fakes and posturing in the media often drive trade positions and those positions find little in the way of fundamental soundness.

One well known flash trading firm designed positions to include both live cattle and feeder contracts in equal size [number of contracts]. They had failed to differentiate the daily volumes in each or the application of differentiated components of the contract. For example, trade bearish trade news from China might cause corn futures to decline because of lost exports but crashing corn would be bullish for feeder cattle contracts. Send market orders for large volumes of buy contracts into the feeder cattle contracts will be certain to jump the price by dollars due to the poor liquidity of a contracts containing a book of 1s and 2s.

 

There are certainly times when newly released information can translate into positions on the Board that can reap handsome rewards, but frequently human judgment is required for the careful design of the computerized trading protocols. Each ill-conceived flash trade presents an opportunity for those in the industry to act with a contrarian view taking the other side.  

 

 

 

 

 

 

 

CATTLE REPORT LIBRARY

 

Below are links to articles published in the Cattle Report pertaining to industry change. Two important changes are on the table for progress -- supply chain management and animal ID. Both applications will transform and disrupt the industry.

 

THE BEEF BLOCKCHAIN

 

THE BEEF BLOCKCHAIN SLIDE SHOW

 

The Case for National ID for Cattle

 

Reforming the Futures Contract and Cash Trading of Cattle

 

 

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 Steer1,098.38146.45
Cost of Gain 600 pounds485.390.81
Estimated Interest(Prime + 1%)40.48 
Current Breakeven1,617.07119.78
Current Futures1,591.65117.90
Net Profit / Loss-25.42-1.88

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 ago1,020.00136.00
Cost of Gain 600 pounds523.170.87
Estimated Interest(Prime + 1%)32.92 
Resulting Breakeven1,576.09116.75
Current Texas Panhandle Cash1,552.23114.98
Net Profit / Loss-23.86-1.77

 

 

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