PLAINS MARKET TALK
The rout of the Chinese stock market cast a pall over the
commodity markets. The downgrading of the Chinese economy will place a
damper on beef exports to China -- the fastest growing destination for US
Futures struggled all day yesterday to find direction
alternating between rallies that were dashed by a new influx in sellers. In
the end, the bears won and futures tumbled. This morning the futures changed
course and rallied but the deferred months failed to participate as traders
look for large placements this fall to weigh on prices early next year.
Show lists expanded beyond last week and in a newly
developing trend above last year. Cattle owners will be on the defensive
this week but a short term rally in futures might provide the cover for
finding some optimism that prices will stop the uninterrupted fall. Bids of
$1.50 over the top were offered in most locations. Beginning asking prices
were mostly at $146-148.
Beef prices following two very light slaughter weeks
managed to work higher. The slaughter rate this week also is expected to
remain at or below the past two weeks. Some good news that retailers are
planning beef features for August may allow enough demand improvement to
start working off what appears to be a backlog in the feedlots. The cutout
gained a dollar to $232 for choice cuts and select at $229. The
choice/select spread is currently $3. Choice cuts are now $20 under prior
With all the negative news, the replacement market took
the biggest hit of the year. A large video auction witnessed much of the
inventory passed out and the few sales reported were dollars lower. The new
price list hit all classes and weights of cattle with many transactions
posting $10-20 cwt. lower prices. Yearlings weighing between 750-850# were
selling from $200-215. Light stocker calves with many of them weaned lost 3
as a first number and moved at $250-290.
Much of the decline in live cattle futures has been in the
deferred months as traders anticipate bunching of placements this fall
setting the stage for sharply lower fed prices next year. This has caused
forward sales of feeder cattle to slow. Most feeder cattle sold in current
market conditions will post losses and some large.
Improved crop conditions and rain where needed and dryness
where needed caused a large drop in corn prices. It also caused some
firmness in the basis. Corn fell almost 20 cents a bushel and is headed in
the direction of the season lows. The corn basis in Guymon, Oklahoma is
currently quoted at +$.60 over the September contract. Corn is now
pricing into rations at $7.80 cwt. in the Oklahoma Panhandle.
BEEF IS BACK CAMPAIGN
The USDA July 1st cattle on feed report will be remembered
mainly in future graphs as illustrative of the bottoming of cattle on feed
numbers and the beginning of increasing numbers of cattle placed on feed to
be available for market at a later date. It also is a good starting point
for the industry to begin efforts to make the public aware that "beef is
back" and to expect larger supplies in the future that will be characterized
by MORE BEEF AT CHEAPER PRICES.
If by some act of magic, we were able to deliver a
normalized slaughter of 650,000 cattle to the marketplace today, it would be
a disaster taking the live market under $1/pound. The marketplace is not
prepared to accept more beef. During the past two weeks of 538/539,000 head
slaughter, the beef cutout has done little more than lose additional ground.
Grocers are concentrating on generous margins generated by pork. Food
service businesses have dropped off several beef options from menus and
substituted cheaper alternative meat options.
It doesn't take a genius to recognize that material work
on the part of the industry is necessary to prepare the ground work
necessary to prepare the food service businesses for the return of beef.
This will require winning over retailers and restaurants to the fact that
not only is beef the preferred meat but those handling beef can do so at a
Many of those involve in beef production currently
question the fact that people can make money producing beef. Except for the
breeder, all sectors in the beef pipeline are losing money currently. The
short supplies of the past two years, now aggravated by holding back breeder
heifers, has taken a toll on each sector as competition has kept input cost
out of line with the final value recognized at each point of sale.
The bunching of placements expected in late summer and
fall will thrown additional supplies on a market early next year and the
marketplace is not ready to absorb increasing numbers of cattle without
structural changes. American business is too often characterized by short
term thinking and the criticism is a fair one. The beef industry needs to
reach the decision makers at the top of the many corporations that depend on
beef as a source input to their food offerings. It is only when menus change
and beef features are commonplace that the marketplace will be able to
accept the building supplies without a major disruption to price.
FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE
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.
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||1,587.75||211.70
|Cost of Gain 600 pounds||471.98||0.79
|Estimated Interest(Prime + 1%)||37.39||
|Net Profit / Loss||-90.42||-6.70
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||1,590.00||212.00
|Cost of Gain 600 pounds||539.88||0.90
|Estimated Interest(Prime + 1%)||32.49||
|Current Texas Panhandle Cash||1,993.41||147.66
|Net Profit / Loss||-168.96||-12.52
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