February 22, 2018                                  

                    

 CATTLE MARKET REPORT AND ANALYSIS

  
BOC Loan

PLAINS MARKET TALK

 

Cash Cattle.

 

Packers jumped into the market following a crashing futures market and were able to buy several thousand cattle mostly on the southern plains at $128 -- two dollar lower than last week. With box prices sharply higher each day, this presents an opportunity to reinvigorate processing margins that have been squeezed the past week as cash prices moved higher. 

 

Seasonally beef demand spikes upward this time of year as weather begins to change from winter to spring. The northeast is basking in 70+ degree temperatures. Improving margins at the beef plants may stimulate a larger slaughter this week. 

 

Cattle Futures. Futures were sharply lower in volatile trading.   

 

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 February 3rd, had steer carcass weights down 1# at 888# which is 1# above prior year. Heifers were 10# over prior year with more heifers in the mix.

 

Forward Cattle Contracts: May and June continue to attract the largest attention in forward contracts. May had a range of $2-5 over the June board depending on when the cattle shipped in May. June reported 10,000 head at Par to $2 premium.  

 

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. The cutout was higher as retail interest scrambled for short term product. The choice/select spread is narrowing as seasonally occurs in most years. The spread has moved from $20 to $5 in the past few weeks.

 

Beef Feature Activity Index. Beef features are often planned months in advance. Retailers look at the pricing of live cattle futures for signals of product availability and price. 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.

 

Cutout Values as of Thursday, February 22, 2018
Choice CutoutChoice Price Change
218.40Up $1.03
Select CutoutSelect Price Change
212.06Up $0.14
Choice/Select Spread
6.34

 

Replacement markets

 

Buyer put the breaks on bids for replacement cattle as feeder futures fall. Earlier week optimism is quickly replaced with warriness on the part of buyers. 

 

Two factors affecting breakevens, that have both remained fairly stable for many months, are in flux. They are feed prices and interest rates. Corn has moved in a narrow trading range for many months but recently has been edging higher. Interest rates after almost 10 years of historic lows are also moving higher and expected to make three more bumps higher this calendar year.

 

Oklahoma City. Heavy receipts were met with strong demand and the results was a market quoted $2-6 higher or most classes of cattle.     

 

Feeder futures. Futures is most contracts lost $2-3.               

 

Feeder Cattle Cash Index. The index now will align with a flat line cash and futures scenario expressed in the spot and deferred futures.  The cash index will likely lead rather than follow futures prices.       

 

Forward cattle contracting. Feedlots are featuring out front purchases for March through May at discounts to the board prices varying from Par to $3 under depending on location, quality and delivery point. 

 

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

 

Corn futuresCorn prices are now moving sideways. The basis, currently at 45 over the March board in Guymon, Oklahoma. Corn is now pricing into rations at $7.50 cwt. in the Oklahoma Panhandle.

 

 

MAKING THE BULLISH CASE FOR COMMODITIES

 

 

Experienced cattle operators are not quick to buy into a case for higher cattle prices this year in the face of a feedlot inventory 8% over prior year and the prospects of heavier carcass weights. There is little doubt that the current supply of fed cattle favors cattle owners and the market is staging a large rally reaching $130 this past week, but future price determination in an open question.

 

The business channel CNBC featured a very articulate guest last week whose business is parsing the various investment opportunities and selecting an area that affords maximum opportunity for placement of millions of dollars of funds. The asset class he feels affords the best opportuntity for appreciation is commodities. His firm is initiating investments in commodities placing 1/3 in ag commodities, 1/3 in energy futures, and 1/3 in metals.

 

The analysis he convincingly delivers is based on two foundations --- improviing global economies and increasing domestic inflation. Many of the current investors have never been through runaway inflation or sky high interest rates -- both are familiar to those to remember President Carter's 20% short term interest rates and President Nixon's price freezes to stop inflation.

 

There has been little inflation since the 2008-9 economic bust. Likewise, interest rates have remained low and stable. Both of those factors are due to change with the unknown being by how much. The Fed has announced they expect 3 more interest rate increases this year with each being 25 Basis Points. Signs of inflation are likewise being reported but the rate of the rise is yet to be determined.

 

The seasonal highs for cattle are expected within the next couple months. The decline into summer will depend on the stability of our export markets. Exports have been the release point for excess beef and all meat supplies. A strong global economy means a emerging middle class in various countries and the accompanying demand for beef. It remains to be seen how this will intersect with burgeoning cattle supplies. 

 

 

 

 

CATTLE REPORT LIBRARY

 

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

 

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 Steer1,094.85145.98
Cost of Gain 600 pounds448.530.75
Estimated Interest(Prime + 1%)30.76 
Current Breakeven1,568.61116.19
Current Futures1,531.58113.45
Net Profit / Loss-37.03-2.74

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 ago1,095.00146.00
Cost of Gain 600 pounds477.580.80
Estimated Interest(Prime + 1%)26.04 
Resulting Breakeven1,598.62118.42
Current Texas Panhandle Cash1,754.33129.95
Net Profit / Loss155.7111.53

 

 

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