October 22, 2014  







This has been a year of two markets, frequently unrelated to each other, and more often functioning on separate tracks. The futures markets in cattle are driven by forces beyond our comprehension and seem to be little correlated to logic and reason. The futures market has operated on a separate track subject to momentary ebbs and flows that mostly are noise playing in the background while the cash markets go about their business of allocating a scarce resource by price and subject to the usual barriers of supply and demand.


Each nervous move up or down in the cattle futures eventually must pay homage to the fundamentals and align at some point to the cash and that point is often close to contract expiration. In the meantime, players in the cash markets that use futures for various types of price protection must function in a mysterious world where little makes sense.


Most activity in the cash market this week has been sales of cattle at two dollars over this week's top whenever or however that is eventually disclosed. Basis traders are asking $2 over the expiring October contract. Smaller show lists in all areas except Nebraska will tip the trade in favor of sellers.  


Box prices flattened out at mid week. The weekly slaughter number remained small and beef supplies limited. Seasonally the next 6 weeks before Thanksgiving are a good time for beef demand. Typically the middle cuts gain more favor as people stock up for the holidays. Choice box prices were quoted at $250 with select at $235 and the spread at $15.


The feeder index is most recently at $241 -- two dollars over the futures for the expiring October cash settled index. November is trading $7 back of the cash index with receipts of replacement cattle expected to peak this month and decline next. The futures market for feeder cattle is playing the same separate track from the cash markets. Wildly volatile prices caused by poor liquidity leave traders in those markets at a loss to select price points for protection. Feedlots are having little success buying November cattle cheaper in spite of the deep discount in the June live cattle contract. A 750# steer is selling for $240 in the southern plains.


Grazing conditions favor promising gains for winter grain fields across a broad cross section of the southern plains. Timely rain and mild temperatures have contributed to good growth. Health issues always at the forefront in the fall, are causing stress among stocker operators who are finding normal death losses in the 10% range to be costly.


Corn futures prices are moving counter seasonally -- gaining in price at a time when farmers are delivering a record crop. Corn reached $3.60 a bushel in the December contract. The crop is estimated to be one third harvested but good weather will speed up the finish. The corn basis in Guymon, Oklahoma is currently quoted at +$.50. Corn is now pricing into rations at $7.00 in the Oklahoma Panhandle.




This Friday will feature the USDA monthly cattle on feed report. The estimates below will place the on feed number at close to prior year. With the large placements expected for October, the Cattle on Feed at the end of October will likely exceed prior year for the first time in a long time.


                   IN YARDS WITH MORE THAN 1,000 CAPACITY
                                                  AVERAGE            RANGE
                                   ACTUAL       OF ESTIMATES     OF ESTIMATES
CATTLE ON FEED        October                           99.7       98.0-100.6
PLACED DURING       September                          101.4       93.1-107.0
MARKETED DURING     September                           99.2       94.0-100.0





The CME globex trading platform displays the best 5 bids to buy and the best 5 offers to sell and traders can view the "Book" using customized software provided by most brokers. To market participants in the field and not on a computer viewing the Book, the fluctuations in the market for cattle futures prices might seem unfathomable.


A closer look at the Book, especially in the feeder cattle futures, provides a clear and understandable explanation. The Book of orders placed on the exchange are simply inadequate to support the entry of larger orders placed on either side of the market. It is not uncommon in the feeder cattle book to find orders for 1 or 2 contracts spaced .25 cents cwt. apart scattered up and down the price chain. The further out in the deferred months the more scattered are the bids and offers sometimes the bid/ask spread is over a dollar.


The implications of this poor liquidity is felt by every trader wanting to buy or sell 10 contracts. A 10 contract order entered as a market order [meaning fill at the best available posted price] might move the market $1 to $1.50 dollars. Predatory traders frequent enter low ball limit orders with the objective of filling some naive person who rushes to get filled with a market order.


Currently lenders are encouraging stocker operators to be sure they have protection for the high priced inventory they are acquiring. Protecting that inventory can either be done with options or hedged with futures. Option prices are so high as to be unaffordable [however, unaffordable is not a useful statement if the market tanks]. This leaves an outright hedge as a preferred course of action but good execution rests with liquidity.


Not helping the situation is the fact that managed futures brokers and hedge funds are pulling out of commodities at a time of economic and political uncertainty. The loss of these major players on both sides of the market is harmful to liquidity.


Poor liquidity favors no one. CME recognizes this fact and will be changing and reducing trading hours at the end of this month. It is the hope of the industry that this will improve liquidity and reduce volatility. In the meantime stay tuned for sharp moves up and down in the livestock futures.




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 Steer1,795.50239.40
Cost of Gain 600 pounds455.970.76
Estimated Interest(Prime + 1%)41.52 
Current Breakeven2,288.49169.52
Current Futures2,230.88165.25
Net Profit / Loss-57.61-4.27


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 ago1,462.50195.00
Cost of Gain 600 pounds522.610.87
Estimated Interest(Prime + 1%)30.11 
Resulting Breakeven2,015.22149.28
Current Texas Panhandle Cash2,214.00164.00
Net Profit / Loss198.7814.72


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