June 30, 2015  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

 

  

PLAINS MARKET TALK


Futures recovered with smaller show lists and ideas that beef demand was stabilizing under the influence of a larger weekly slaughter however light it was at 555,000 cattle. Late Friday sales at $149 encourage some cattle owners that $150 might be achievable this week.

 

Many packers have been paying a price for the reduced hours. The down time creates inefficiencies in the beef plants in the form of increased kill cost per head. It also creates tough labor issues as some employment contracts call for minimum number of hours per week. Finally, the admin expense is burdened over a much smaller number of cattle. All of these factors encourage the full use of facilities but for much of this past year the cattle simply have not been available.

 

Box prices were steady in early week trading. The slaughter rate for this June will be remembered as the smallest in modern history. Choice cuts were at $253 and select at $248. The choice/select spread is currently $5.

 

The wet conditions existing on much of the plains is good for forage growth but not always good for gains. Grass can get too washy and sometime wet conditions in grass fields are not ideal conditions for growth and gains. Some weigh ups across the country are falling short of expectations.

 

Even a recovery in feeder futures failed to put much momentum into new bids from feedlots. Grain prices have hurt cost of gain estimates and lower fed prices and higher grain mean more trouble for cattle feeders. Oklahoma City reported average receipts and $3 lower prices with a 750# steer selling for $225.

 

The crop ratings sank and the crop conditions now are in poor shape when compared to the past 10 years due to wet fields. This mornings USDA report will be unlikely to reflect the damage caused by flooded fields in the corn belt. It is rare to see grain market jump skyward from too much rain but that is the current condition. Corn prices have retraced about 30 cents a bushel of previous losses and have moved sharply higher. The corn basis in Guymon, Oklahoma is currently quoted at +$.60 over the July contract. Corn is now pricing into rations at $8.00 cwt. in the Oklahoma Panhandle.

 

 

 

THE TOTAL MEAT SUPPLY SITUATION

 

The cash prices for fed cattle last week crossed the graph line with last year and fell below last year's prices for the first time this year. Last year, the last week of June found fed prices near $155 vs. this year's $148. Some traders and cattle owners are looking at the fed supplies this year, indicated by a steer and heifer slaughter that is 50,000 head per week under last year, and wondering how we can be selling cattle lower than prior year.

 

In rounded numbers the answer is fairly straight forward. The average daily slaughter of cattle has declined 6% from last year. The slaughter weights are heavier than last year and there are more steers in the mix due to holding back heifers for rebuilding. These two factors helps to reduce the tonnage loss to approximately 2.5%. In the meantime, hog slaughter is up 6% over prior year and chicken production is up 4% over last year. Food service and grocery stores are making money selling plentiful pork and chicken.

 

Supporting the large supplies of total meat has been beef imports that are dramatically higher than last year assisted by a strong dollar. All of the countries sending beef to the U.S. have ramped up business and volumes are running 25-50% over last year. The imported beef has struck a blow to the grind market that led the summer rally in cattle prices last summer. Also aiding in the decline of fed prices this year has been the drop credits. Hide prices are 25% under last year and all drop credits are taking $50/head from the packer's bottom line.

 

The analysis early this year that caused the first large decline in cattle futures cited large competing meat supplies, large imports and heavy weights as ammunition for a fed market in steep decline. Since those early forecasts, futures prices for summer and fall have stayed in a fairly tight trading range hovering around $150 while fed prices have fallen from $170 to $148. But where do we go from here.

 

Last year cattle prices for fed cattle continued to rise into the fourth of July and beyond taking prices into the $160s. This year packers have pared the June daily slaughter level to the lowest in modern history in an attempt to regain some bargaining leverage over cattle owners who have been able to hold on to those high prices in spite of box prices that seem to decline with every slaughter week that exceeds 550,000 cattle. More cattle will be available in July but the pipeline of beef is short bought and retailers have the ability to push move beef if the economic incentives are there.

 

 

 

 

 

FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES

 

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 futures contract.

INPUTSTOTAL$$CWT
750 # Feeder Steer1,611.00214.80
Cost of Gain 600 pounds488.120.81
Estimated Interest(Prime + 1%)38.03 
Current Breakeven2,132.33157.95
Current Futures2,047.68151.68
Net Profit / Loss-84.65-6.27

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 ago1,800.00240.00
Cost of Gain 600 pounds570.360.95
Estimated Interest(Prime + 1%)36.42 
Resulting Breakeven2,406.78178.28
Current Texas Panhandle Cash1,997.73147.98
Net Profit / Loss-409.05-30.30

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