December 17, 2014
CATTLE MARKET REPORT AND ANALYSIS
PLAINS MARKET TALK
A total freefall in cattle futures, cash cattle, and beef
took over the markets. All contracts were locked limit down in
both live and feeder cattle. This is the fourth consecutive days
of limit down movement in feeder cattle and a committee at the CME was
meeting to discuss expanding the limits. Bankers are nervously pressuring
cattle owners to protect dwindling or evaporated or negative margins.
The downward track of cattle futures seems closely aligned
with and parallels the decline in oil prices which reached $55 yesterday.
This phenomena belies the important benefit to consumers of cheaper gasoline
providing unexpected room in the family budget for high priced beef that is
getting cheaper by the day.
The translation of both lower oil and lower cattle prices
do not move immediately into the marketplace but anyone driving around can
see gas prices falling on the corner of the local gas station.
Smaller show list this week will face off
with smaller slaughter needs for next week. Most asking prices were at $4
over the December contract. Hedgers of newly purchased cattle were finding
few buyers to take the long side of their hedges in the distant months and
the futures price decline has specially hit the deferred months.
Box prices fell along with other segments of the cattle
complex. Retailers are sensing an opportunity to replenish depleted
inventories with much cheaper cuts. At some point they may choose to
switch horses and plan beef features for the post Christmas period. Choice box prices were quoted at $243,
with select at $234 and the
spread at $11.
A major realignment is occurring in feeder cattle prices.
Futures once again were limit down. The cash markets responded to the price
correction and Oklahoma City reported prices down $8-12 cwt. on offerings of
6000 cattle. Overpricing in the feeder arena is caused by competition among too much feeding capacity
and too few cattle. Many feedlots pulled out of the market awaiting further developments
and watching the futures market. The feeder index remains well above futures
but is falling on a parallel track. A 750# steer is selling for $218
in the southern plains.
When futures are locked limit down, some simple math can
impute the trading price by using the option prices to determine the implied
pricing of the futures. Traders report that options are implying another $6
drop in feeder futures. Exacerbating the downward pressures on futures are
the options holders who have sold puts and need to protect the rising value
by offsetting those positions with short futures.
Corn prices are moving higher well above $4 in all trading contracts. Funds
have been positioning on the long side in the grains as transportation woes
plague the multicar trains of grains in-between Canada and the United States
and in the U.S. between the corn belt and the southern plains.
basis in Guymon, Oklahoma is currently quoted at +$.40 over the March
contract. Corn is
now pricing into rations at $8.25 cwt. in the Oklahoma Panhandle.
No one likes the position of running a business and
lacking control over the primary components. The cattle rancher fears a
drought because he is helpless to afford corrective action. Likewise the
beef processing company is frustrated when unable to line up sufficient
animals to process a complete shift in the beef plant. The feedyard manager
can always keep the pens full at some price but when the purchase price
results in unsustainable losses, the options available to remedy the problem
This industry wide problem puts all participants back on
the same footing -- survival and how we make it work. Borne out of the
frustration of bad options is innovation. It is human nature to react to
seemingly unsolvable problems with new approaches -- some will work and some
will fail. The beef plants are encouraging feeders to add more pounds to the
target finishing weight in an attempt to increase beef tonnage. Feedlots are
responding assisted by the economic need to lower breakeven prices in a time
of negative margins. Some feedlots turn to dairy calves in an effort to slow
the turnover and find the ever elusive margins.
The most common change is the movement on the part of beef
producers across the country to rebuild the herd. Sky high prices have
results in the largest ramp up of new breeders in the history of cattle
cycles. It took a long time to happen but now the evidence is everywhere to
be seen and realized in the near future.
Old time economics jumps in and fills the voids felt by
many sectors of the industry. A strong dollar has made the U.S. a
destination for beef from Australia, New Zealand, and South America.
Shortages, caused by a cow slaughter running 15% under last year, creates a
need for a lot of ground beef. That same strong dollar has made our exports
of beef more expensive leaving more beef available for domestic consumption.
All of these factors are attempting to bring into balance
the needs of the consumer -- affordable meat. Probably the most important
strategic objective of the beef industry is the desire to keep beef at the
center of the plate for the consumer. Turkey burgers, chicken sandwiches,
and other alternative menu offerings are the retailers and food services
attempt to fill in for beef. As the herd rebounds, we want beef reclaiming
lost territory on the meat counters of the country.
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.
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.
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