March 5, 2015  








Smaller show lists and more active packer activity changed the direction on cattle futures and reinvigorated bullish sellers who are confident of achieving higher prices this week. Initial bids of $157 were quickly refused pushing packers to raise bids to $159 where only a few cattle traded. Asking prices ranged from $162 to $10 over the April board. While short sellers may get the last laugh, for the time being the bulls have control of the market.


Wednesday's rally put the chart and technical traders to work. Disparate theories of price patterns were expressed with the majority citing the $154-155 as an important resistance point if and when breached the market might move sharply higher.  It does appear likely that the current premiums of cash over futures may continue into the summer with the June board lagging the cash market by $15 cwt..


Beef gets lumped with all meats while the realities of cattle supplies on hand and placed on feed paint a different story. Cattle placements on feed this year and ending last, are down sharply from prior year assuring smaller supplies of fed cattle through the summer. The show lists fell this week as weather takes a toll on cattle performance. Cold and wet pens has hampered some winter gains and cattle are carrying some mud to the beef plants.


Box prices showed buying support last week and continuing this week. The slaughter rate should increase moving into spring with larger slaughter numbers and better beef demand. Box prices were firm for select and weak for choice at $248.50 with select at $247.50 and the spread at $1.


Feeder futures moved up the permissible limit of $4.50. This was and is a constant reminder to cattle feeders that volatility in replacement cattle will be something that must be built into any procurement model and what you do today may be totally out of the money tomorrow or may be a great buy. Any movement in feeder prices is fragile and may soon disappear. This has the feeding companies living hand to mouth with purchases. Snow and cold weather slowed auction sales left many supplies of cattle being pushed forward for marketing purposes.  A 750# feeder steer was selling for $205 on the southern plains.


Corn prices moved sideways continuing the trend of the past few weeks. Corn acre plantings are estimated to be smaller this spring than last year. The corn basis in Guymon, Oklahoma is currently quoted at +$.60 over the May contract. Corn is now pricing into rations at $8.00 cwt. in the Oklahoma Panhandle.




One can look at any given contract of live and feeder futures and know one thing -- the prices last quoted on the exchange will be wrong. Each transaction making up trading sessions is a guess or a bet of future prices and 99.9% of those guesses will be in the final analysis determined to be wrong. This pertains to longs and shorts.


The CME as the operator of the exchange where those futures are traded has no obligation to provide satisfactory prices to hedgers or to provide a profit to speculators. They do have a responsibility to provide a fair marketplace and to assure the rules are followed and the contract specifications are relevant to the industry and product described.


The February contract expired Friday. Recently, the contract traded down to $150 and market watchers complained those prices were out of touch with the fundamentals and the contract was broken. In the final analysis the contract's expiration, the price level corrected to cash prices. With the exception of a handful of contracts trading in the last minutes, most of the last two day saw the prices above $160 or near the final cash.


April now assumes the role of spot month and again is trading just over $150 after having traded as low as $145 last week. Macro-investors have been betting the entire commodity complex was due for a decline and cattle are part of the basket in those bets. The money controlled by hedge funds can easily overwhelm the normal money flow in cattle contracts. The result and the disconnect has been between the cash and the futures giving the cash the largest premiums to futures in years -- maybe ever.


The implications for the industry is for change in marketing tactics. More cattle feeders are covering hedged positions and selling cattle forward in the cash market. Other unhedged feeders are forward selling the cattle and buying the futures. Both strategies are designed to capture the spread between current cash and current spot futures.


It is always easy and convenient to comment on the fact that those shorting the futures lack any knowledge of the market fundamentals. This is wrongheaded. There will be more pork and chicken in future months and beef will struggle to keep its price premium in the supermarket. No one is able to properly measure and predict that supply/demand price point. But always if market watchers believe the futures contracts are mispriced, they can place their bet. Those operating in the cash markets for cattle, feeder and fed, are betting every day with their purchases that the premium basis will continue.










Readers have been sending notes regarding breakeven projections. One commenter ask how we could use 80 cents for a cost of gain when everyone knows that is too low. Another ask why we are using such a high cost of gain number. The two emails illustrate the difficulty of providing one benchmark for all regions of the country. Currently a typical bases in the corn belt might be $1 under the futures and alternatively a corn basis in Hereford, Texas might be $1 over the futures. The northern feeders have much cheaper grain and more expensive feeder cattle. A more meaningful report would include one breakeven and close out for each major region. It also is difficult maintaining the tables when both fed and replacement prices are changing in $5-10 cwt. price blocks.




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 Steer1,518.60202.48
Cost of Gain 600 pounds482.990.80
Estimated Interest(Prime + 1%)36.07 
Current Breakeven2,032.90150.59
Current Futures1,947.11144.23
Net Profit / Loss-85.80-6.36


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 ago1,725.00230.00
Cost of Gain 600 pounds530.970.88
Estimated Interest(Prime + 1%)34.77 
Resulting Breakeven2,290.74169.68
Current Texas Panhandle Cash2,143.80158.80
Net Profit / Loss-146.94-10.88

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