PLAINS MARKET TALK
Cash Cattle. Watching the posted prices on live cattle futures is
setting the stage for a rapid decline in cash prices. The expiring Feb is
followed by a $10 decline into April live cattle followed by another $10
decline into the June contract followed by another $5 decline into the
August contract. It is not unusual seasonally for prices to decline into the
summer and placement patterns were heavy following October of last year.
All is not gloom and doom. Beef demand is good and we are slaughtering 10%
more cattle currently than last year. The discount in the forward months is
keeping the feedyards current as they market cattle earlier. Some hedged
sellers are noting the advantage of marketing now rather than adding another
100# and taking a significant discount in price.
majority of the sales last week were mainly at $125. Dressed sales were mainly at $195-197. Live sales were $5 higher and
dressed $5-7 higher. Cattle owners will test this week to see if additional
gains are in the market and to confirm last week's packer interest in buying
forward in March.
Cattle Futures. The rally this past week
was mainly limited to the expiring February
contract. The deferred months refused to budge and fell in trading on
Friday. As February expires, many see little reason for April to decline
further and some will risk leaving a protected state by removing hedges.
are released each Thursday and will be a closely watched barometer
indicating the position of cattle feeders in the nation's feedlots. The last
released for the week of February 11th, had steer carcass weights falling by
to 879# remaining well under prior year. This also was seen as
supportive of near term prices.
Contracts: There is little activity in forward contracts. Packers
are interested in forwards but sellers lack interest due to the recent
decline. Sales are reported by USDA each Monday and below are those for the largest
volumes of beef cattle. Basis trades were almost non-existent last week.
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. Box prices shot continued higher as packers raise asking prices faced
with sharply higher input costs. The slaughter rose to 572,000 last week from
524,000 last year. The improvements in box prices this week will go a long
ways towards offsetting the rise in live prices. Warmer
weather is the feature across much of the nation and this might create
additional retail interest in beef in the upcoming weeks.
The cattle inventory report released the end of
January showed more heifers held for breeding. Nonetheless, heifers are also
increasing in feedyard placement.
The role of increasing heifer placements is important in assessing the
stages of the cattle cycles. Current placements would seem to indicate
the expansion buildup of the national herd is continuing but slowing.
|Choice Cutout||Choice Price Change
|Select Cutout||Select Price Change
March is expected to bring on board larger offerings of
cattle. Anticipating this development, futures prices fell losing $3 in late
week trading. Stocker operators who have carefully watched the auction barn
prices mainly in Oklahoma City have passed on country bids deciding instead
to take a risk at the auction. As these increasing supplies of cattle hit
the market in March, feedlots that are filling fast will be lowering bids
The main change in prices will be the basis levels for
feeder cattle that were reaching historically wide levels in February. 800#
cattle were selling with $3 premiums delivered to the Texas Panhandle and
this level provided many proforma breakevens negative by $50-75/head. Those
premiums are expected to disappear and more cattle are offered off winter
wheat fields in March.
Oklahoma City. Both yearling classes and calves were steady Monday in
trading at the OKC auction.
Mid week sale at
followed the lead of OKC and traded mostly steady.
Feeder futures. The feeder futures fell in expectation of the USDA
cattle on feed report and larger supplies of cattle to move in the March-May
Feeder Cattle Cash Index. The index has stopped falling and is holding
above current spot futures prices.
Forward cattle contracting. The feeding companies that have been
raising basises for current offerings will reverse course and reduce those
basis trades for cattle delivering through the summer.
Weekly Feeder Summary released on Friday of each week tracks the
national prices by region for last week.
Corn futures. Corn and wheat moved lower in late week trading. Traders are awaiting the first early forecast of corn
acreage that is expected to be down by 1-2 million acres. Corn
are 25 cents over December in Guymon,
Oklahoma. Corn is now pricing into rations at $7.25
cwt. in the Oklahoma Panhandle.
CATTLE ON FEED
U.S. CATTLE ON FEED ESTIMATES
IN YARDS WITH MORE THAN 1,000 CAPACITY
ACTUAL OF ESTIMATES OF ESTIMATES
CATTLE ON FEED February 101 100.6 99.8-102.5
PLACED DURING January 111 110.6 106.8-118.2
MARKETED DURING January 110 110.2 106.3-110.0
The Monthly USDA report came in right on target with the average of
A TALE OF TWO MARKETS
Cash cattle have moved sharply higher and some believe the
run may not be over. Box prices are moving higher every day and show lists
have been smaller. Most importantly, carcass weights have been dropping
leaving smaller beef tonnage to sell. The February spot futures contract
will expire in a few days. February prices have been reluctant to
acknowledge the rise in cash prices and have been dragged or yanked higher
to match cash prices. The deferred contracts have refused to acknowledge the
advances in cash prices. April closed last week $10 cwt. under the last
week's cash prices. It is set to be the spot month next week.
The most obvious beneficiary of this price action is the
hedged feeder. This level in the basis leaves the hedged feeder with large
premiums rarely experienced in the marketplace. But things are never so
simple. Some commercial hedgers run a very disciplined program, buying
replacement cattle, selling deferred futures in the live cattle, buying corn
contracts and covering those positions as they mature. Other hedgers pick
their time to hedge and pick their time to exit the hedge. A cattle owner
with March/April cattle to sell and wanting to hedge is not finding the
opportunity to hedge particularly attractive.
In other commodity markets, the current situation in
cattle would present a perfect opportunity for the entrance of the
speculative long. A speculative long would attempt to capture the $10 spread
between April futures and today's cash prices. The trouble in today's
environment, the speculative long is afraid to enter a spot contract month
when one might expect to have unwanted cattle delivered to the long in
Clovis, New Mexico or the many of the other designated delivery points
across the nation. This condition denies the sometimes hedger the market to
protect a price.
A different view would be the market is expected to crash
between now and April. Everyone knows and acknowledges that placements past
October of last year moved sharply higher with many placement months
reporting double digit increases. Picking the time when to expect a wall of
cattle is difficult for the most expert market readers. The discount in the
April contract has many cattle owners moving cattle forward and this
condition is confirmed with the declining carcass weights that now are 12
pounds under last year. It is further confirmed by packers willingness to
extend purchases of cattle well into March as current prices.
A healthy marketplace for derivative contracts provides
opportunity for both longs and shorts to develop theories on prices and
execute positions to capture expected price movements. Today's live cattle
contract with a delivery component discourages entry and robs the
marketplace of the needed liquidity on which every vibrant market depends.
NOTE TO READERS
Sections of the newsletter are redesigned with hyperlinks
to the appropriate source pages. The hyperlinks are in light blue within the
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||928.88||123.85
|Cost of Gain 600 pounds||443.88||0.74
|Estimated Interest(Prime + 1%)||26.88||
|Net Profit / Loss||-24.18||-1.79
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||1,035.00||138.00
|Cost of Gain 600 pounds||446.75||0.74
|Estimated Interest(Prime + 1%)||24.56||
|Current Texas Panhandle Cash||1,613.66||119.53
|Net Profit / Loss||107.34||7.95
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