PLAINS MARKET TALK
Cattle prices ended on a weak note uncoupling from a
rebound in stock and oil prices. Cattle owners continued to sell cattle at
lower prices. For the week, Kansas and Texas traded cattle from $132-134.
Iowa posted sales from $128-130 with dressed sales at $$205-206. Nebraska
traded most cattle from $130-132 with dressed sales mostly at $206. The only
positive sign of confidence in the market was the fact packers were willing
to add additional inventory at the bottom end of the trading range.
Futures prices are struggling to understand which is the
real cash market for cattle. The live cattle contract is based on a live
cash price. Traders look to sales prices of muddy cattle in the north
ranging from $126-130 then see reports in the southern plains of $134 then
will find, after the fact, next week, that many cattle brought back live
prices of $135-140 under various types of formula arrangements.
February has never been a beef eating month and storms and
transportation disruptions have not helped. The market is not suffering from
too many cattle but too little demand. Breaking the cutout into the primal
cuts offers some explanation of the troubled beef market. The middle meats
are finding good demand and prices for the ribs are actually higher than
prior year. The drag is the end meats and the grind. Sales of those cuts are
finding stiff competition from cheap pork and chicken. A warm up in the
weather can turn around interest in those beef cuts.
Box prices have been unevenly mixed all week. They haven't
fallen like the cash markets and sporadically have shown signs of support
but weekly losses are near $4. Plants will be returning to a more normalized
slaughter schedule. A warm up in much of the nation was in the forecast and
restocking meat counters and warm weather might presage improvement in beef
demand. The choice cutout was quoted $1 lower at $216 with select at
$212 leaving the spread at
Feedlots will reassess purchasing strategies over the
weekend after another volatile week sending feeder prices lower once again.
Losses in early week trading were compounded by late week weakness in
futures and fed cattle prices. Feeder cattle prices were $3-5 lower in Oklahoma City as a
crashing futures market took its toll on buying interest. Calf prices were
more resilient as stocker operators prepare inventories for spring and
summer grazing. Condition and health on high risk cattle associated with
sale barn purchases seasonally improves this time of year as calves lose fat
and are harder and some calves are weaned prior to sale. Average yearling steers were
selling in the high $140 on the southern plains.
Corn futures continue to move lower moving towards the
lower end of a $3.60-70 trading range. There will be little reason to change
pricing until new information develops of the spring plantings. This is
barring a major development in the South American crops. The corn basis in Guymon,
Oklahoma is currently quoted at +$.40 over the March contract. Corn is now
pricing into rations at just above $7.25 cwt. in the Oklahoma Panhandle.
HUMAN NATURE IN FUTURES TRADING
The impulse to sell when the market is crashing and buy
when it is soaring is as old as human nature itself. Warren Buffett warns us
to buy when others want to sell and sell when others want to buy. But this
is contrary to human nature. No matter the rationale, the information and
emotion sending the market in one direction tends to overwhelm our most
rational instincts and carries us along with the crowd. Getting caught up in
the volatility of the cattle futures has been unavoidable for those
attempting to hold on to margins by protecting risk through the futures
Anyone who has been trading in the futures market for more
than a few weeks is aware of the sinking feeling in your stomach when an
attempt to hedge a new position finds the market moving away from you. In
more normal times, the market would move a few points then realign and move
back, but these are not normal times. Instead of finding prices moving a few
ticks one direction then a few ticks in the other direction offering traders
a chance to enter and establish a position, these sessions in the cattle
futures are frequently characterized by extreme moves in both directions.
Patience is usually a virtue and overcoming emotion in a
trading environment is generally advised and the tools for overcoming
emotion are rooted in careful rational thought. The problem is
accountability. Generally, in any hedged cattle operation, one person is
responsible for managing the futures position and held accountable. In the
extremely volatile environment of the past few months, positions either
don’t get placed or are placed at the wrong price and/or at the wrong time.
The risk manager then become the scapegoat.
Prominent in the mind’s eye is the moment of indecision
that resulted in a lost opportunity for hedging, and the attendant financial
repercussions. Everyone can remember when “I should of, or I could of” and
initiating a position frequently causes an over-reaction by chasing the
moving target with the resulting fill far out of range from the target
price. That is life, but the memory sticks and is dominant over the lapsed
memory of the hedge where the market moved in your favor with an fill much
improved over the target.
Helpful in the risk management assignment is a
well-functioning marketplace. Well-functioning markets bring liquidity,
transparency and confidence of the participants in the structure of the
underlying product the futures contract is referencing. Those elements are
missing in the cattle futures setting up the risk manager as the fall guy in
the business of protecting risk.
FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE
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
|750 # Feeder Steer||1,128.38||150.45
|Cost of Gain 600 pounds||445.38||0.74
|Estimated Interest(Prime + 1%)||30.12||
|Net Profit / Loss||-30.64||-2.27
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.
|750 # Feeder Steer OKC 150 days ago||1,575.00||210.00
|Cost of Gain 600 pounds||524.85||0.87
|Estimated Interest(Prime + 1%)||33.98||
|Current Texas Panhandle Cash||1,834.65||135.90
|Net Profit / Loss||-299.18||-22.16
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