THE MARKETS

 

 

 

February 26, 2021

 

CATTLE MARKET REPORT AND ANALYSIS

  

 

PLAINS MARKET TALK

 

 

Cash Cattle

 

 

Cattle owners, finding themselves unable to sell cattle at higher prices, instead chose to sell futures instead. Packers have demonstrated their ability to capture ever last sliver of profit in the beef chain. For the third week in a row, very light cash sales at $114 live and $181-2 dressed closed the week. Processors will end the week with margins in excess of $400/head as box prices moved higher to close the week.

 

This week's slaughter at 666,000 head is near a high for the year and 38,000 above last year. The previous two week's slaughter of 552,000 and 608,000 head left a gap in the supply chain. Cattle owners seem to find these reoccurring black swan events with each taking a toll on the supply/demand balance and always bias in favor of the processors.

 

Cattle Futures. Cattle futures were sharply lower as the traders gained the realization that packers were not going to raise cash prices. Carcass weights are showing significant declines. The market will now be required to grind until sellers can establish some trade leverage. This is always held like a mirage in the future. 

 

The final minutes of a terminating contract is a poster card for a failed contract. During the last hour of trading, the bid/ask for the remaining positions were often $2-3 spread daring one side to hit the other. Quotes might jump a dollar or two with one trade and the settlement prices bears little relationship to current cash. It is a chicken game with each side staring down the other with forced resolve.

 

The Comprehensive Fed Cattle Weekly Report offers the most current information on the current status of fed cattle being harvested. The report is published each Tuesday and includes the previous week's change in carcass weights and quality grading. The latest report shows carcass weights down 7# at 883# which is 9# over last year. Quality grade grading was up .7% at 85.80%. Expectations are for carcass weights to begin a significant decline in the coming weeks from the storm. Grading has reached a seasonal high.

 

Forward Cattle Contracts:  Forward contracts will always bear some relationship to the corresponding futures month closest to the delivery month for the cattle. Basis levels will move up and down as processors want to add to forward contracts or not. Sometimes the forward contracts are associated with forward sales of beef and sometimes not. Packers may simply try to add an extra margin for taking the price risk off the hands of the producer. 

 

Weekly graphs on the Comprehensive Weekly Fed Cattle Report break down the categories of trade for the week according to 1) formula cattle; 2) negotiated live; 3) negotiated dressed; 4) and forward contracts. Some cattle included in the formula category are week to week negotiated grids and not committed cattle to one plant. Other cattle designated as formula are "over the tops".

 

The Cutout. Box prices were modestly lower. Restocking is near completion and box prices will likely give up some of the recent advances but margins remain historic at the beef plant. Box prices are the second highest on history and live prices for cattle are at a 10 year low for this period of the year. Is there a message in this fact?

 

The past year has been an anomaly for food markets. Runs on food supplies during the pandemic, then during the recent cold spell, left many stores assessing how the logistics of their operations serve their needs. Many of the largest grocers work from distribution centers adding an extra leg to the transportation matrix. Some beef processors have built new facilities designed to fabricate and deliver directly to stores making distribution centers unnecessary. The challenges of the pandemic and cold spell emphasize the importance of food logistics in delivering supplies quickly to consumers during unexpected interruptions.

 


 
Choice CutoutChoice Price Change
240.53Up $0.14
 
Select CutoutSelect Price Change
229.73Up $0.94
 

 


 

 

 

Beef Feature Activity Index. As Covid cases decline, both retail and hotel/restaurant trade will be planning springtime beef features. Restaurants that have been closed or pared back, will anticipate full dining use and many will provide return specials. Grocers will plan on steaks for spring cookouts.

 

 

Replacement markets

 

In the southern plains, temperatures have warmed and normalized operations have returned. Snow cover is limited to the northern plains. Stocker operators are assessing pasture conditions. In some cases, the pasture will benefit from the moisture and provide generous spring grazing. In other instances, winterkill may be a factor. Wheat is fairly resistant to cold. Farmers will now make judgments regarding the financial benefits of harvesting wheat rather than grazing.

 

Feeder cattle sales continue at large basis discounts to the feeder board. High priced corn has hurt replacement prices and made them a slave to corn prices. Few purchases of feeder cattle satisfy a successful financial proforma. Most breakevens are largely negative. March is likely to be a large month for cattle movements.

 

Oklahoma City. Very few cattle were on hand for this week's market and the trade was forced $2 higher on meager offerings. As the temperature warms and fields dry more cattle will be moving to auction.

 

Feeder Cattle Futures. Feeder futures were sharply lower. As prospects for warmer weather ahead, feedyards will need to push for supplies to replenish empty pens.

 

Feeder Cattle Cash Index. The index is tracking the moves in cash prices.   

 

Forward cattle contracting. Feedlots, with much uncertainty about feed costs, are becoming reluctant to be active in the forward markets or are lowering their basis bids. Basis levels for all replacement feeder cattle have been unusually wide.

 

National Weekly Feeder Summary released on Friday of each week tracks the national prices by region for last week.   

 

Grain Futures. Grain prices moved lower continuing to shows signs the top is behind us. Poor export news combined with rumors of large corn plantings this spring encouraged a sell off. There is little carry in the corn futures keeping basis levels on the defensive. Current basis trades are for corn at 85 over the May board in Guymon, Oklahoma. Corn is now pricing into ration at $11.50 cwt. in the Oklahoma Panhandle.

 

NOTES FROM ALL OVER

 

Beyond Meat timed a news release to accompany dismal earnings this week. They announced partnerships with McDonalds, KFC, and Pizza Hut to be a preferred supplier of their plant based meat imitation products. The news was not so good on the financial side as the company reported a $25 million dollar loss for the fourth quarter of 2020. U.S. food service sales dropped 43% from the same period last year. Investors also were not encouraged with a recent poll of consumers who would gladly pay up to $2 extra for a real burger.

 

 

THE BEEF BALANCE SHEET -- POST STORM

 

Every beef producer regrets lost beef sales. A consumer travels to the store, navigates to the meat counter, then finds no beef available for purchase. The consumer examines the other options available. In some instances there are no meats available or only a few meat options. The consumer's exit from the supermarket represents a lost beef sale. Most of those lost sales are never regained and represent an undesirable change in the supply/demand balance sheet.

 

Stocking and logistic problems in the food supply chain are not all lost sales. Sometimes, especially during power outages, food spoils. Extended periods without power causes food to get out of condition and forces spoilage. This food must be thrown out. Certainly across the south this occurred in homes, restaurants, and supermarkets. Some of the food may be salvaged but much will not.

 

Restocking is sometimes slow to develop and gauging consumer demand post weather event is difficult. Eating habits change during the weather event and people are anxious to return to more familiar fare once the weather clears, and winging it for food is left behind. Sometimes this can cause more eating out post storm, and sometimes more carefully planned "eat at home" dining. Computers are tracking supply chain shortages and adjusting on the fly new orders and delivery dates.

 

The production side of the beef business is also challenging to measure and determine the impacts to the supply/demand curve. Beef plants will return to normal operations this coming week but over 100,000 head of fed cattle have failed to be harvested in the interim. The big picture problem for beef processing is the oft repeated issue of under-capacity in beef processing. Most businesses would quickly respond to under-supply by running extra hours in the existing plants. The beef plants have been running at capacity all the time, enjoying record breaking profits, but have failed to build new plants.

 

The brunt of the harm will fall to the nation's beef producers who will suffer production losses of millions of lost pounds of gain on cattle. Two week's of high priced feed will have resulted in negative weight losses in many of the nation's feedyards and outside cattle will have suffered outsized death losses and weight losses. These losses are not immediately measured by computer tracking systems but will be realized over the feeding cycle in the storm premium to the cost of gain.


CATTLE REPORT LIBRARY

 

Below are links to articles published in the Cattle Report pertaining to industry change. Two important changes are on the table for progress -- supply chain management and animal ID. Both applications will transform and disrupt the industry.

 

THE BEEF BLOCKCHAIN

 

THE BEEF BLOCKCHAIN SLIDE SHOW

 

The Case for National ID for Cattle

 

Reforming the Futures Contract and Cash Trading of Cattle

 

 

NOTE TO READERS

 

Sections of the newsletter are redesigned with hyperlinks to the appropriate source pages. The hyperlinks are in light blue within the report.

 

 

 

 

FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES

 

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 futures contract.

INPUTSTOTAL$$CWT
750 # Feeder Steer1,040.10143.68
Cost of Gain 600 pounds622.661.04
Estimated Interest(Prime + 1%)27.63 
Current Breakeven1,684.26124.76
Current Futures1,580.18117.05
Net Profit / Loss-104.08-7.71

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.

INPUTSTOTAL$$CWT
750 # Feeder Steer OKC 150 days ago975.00130.00
Cost of Gain 600 pounds620.961.03
Estimated Interest(Prime + 1%)22.45 
Resulting Breakeven1,618.41119.88
Current Texas Panhandle Cash1,539.00114.00
Net Profit / Loss-79.41-5.88

 

 

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