PLAINS MARKET TALK
Cash Cattle. Bids started the week at $124 in the south and $196 in
eastern Nebraska. Neither attracted any sellers. The climate is still more
positive this week in spite of lower futures yesterday.
Cattle Futures. Technicians were commenting on the bounce off the lows
yesterday and confirming a bottom for now. More important will be the
development of the cash trade and the size of the slaughter moving forward.
The deferred contracts may be well oversold and cattle owners will be
reluctant to short those contracts at this trading level.
released for the week of April 9th showed a 4 pound decline in steer weights.
This is a continuation of seasonal trends but has failed to fall as fast as
most experts forecast. Steer weights remain
9# above last year. Carcass weights and the tonnage associated with the
carcass weight reports are a key factor in setting the tone for the cutout
and assessing beef demand.
Contracts: Cattle forward contracts bought for May delivery are
well under last year. Packers sensing tight supplies in May and June are
attempting to remedy that condition by adding more forward contracts.
Current bids at $196-198 dressed.
For last week the breakdown of purchases by packers is the following: 1)
formulas 55% 2) negotiated 25% 3) forward contracts 20%. Forward contracts
in May were equal from $4 over the June to $7 over the June. The bulk
The Cutout. The choice cuts lost ground at mid week and there is a lot
of attention to how large this week's slaughter will be with packers
operating with generous margins. Processors and retailers have been the winners in the
margin contest this past week and the new lower prices may encourage more beef
specials in the coming weeks. Retailers are following the lead of packers by
forward contracting May cattle are largely discounted prices.
|Choice Cutout||Choice Price Change
|Select Cutout||Select Price Change
Oklahoma City. Auction prices in Oklahoma City continued to fall despite
the gains in cattle futures. Prices are still undergoing a change from the
rout in futures last week. Many handy weight feeders were selling in the low
$140s with heavier steers dipping into the $130s. Calves also suffered
losses as most summer grazing demand is waning and breakevens for fall call
for much lower prices.
Sellers of feeder cattle are much like the feedlots. Large
moves down propel their interest in selling and large moves up make them
desire to hold and await higher prices. Selecting the right time to sell is
not easy in volatile markets.
Feeder futures. With April expiring this week, the remaining
contracts through the fall are flat prices in the low $140s. Feeder futures
will be sensitive to the new volatility in the corn contracts.
Feeder Cattle Cash Index. The feeder cattle index is on track to follow
cash prices lower to expiration of the April contract. A one day drop this
week of over $3 gives some indication of the index vulnerability to the
daily reference points.
Weekly Feeder Summary tracks the national prices by region for last
Corn futures. Corn futures are adding volatility following several weeks
of quiet non eventful trading. The early morning gains failed to hold but
corn still is moving off recent lows. Farmers
who have been searching for a bail out on this summer's crops took the $4
level as an excellent time to position some selling for fall but the $4 was
available for only a short time. The basis is
currently around 30 over the May contract in Guymon Oklahoma and is
softening. Corn is now pricing into rations at
under $7.00 cwt. in the
ANOTHER LEG DOWN
Navigating through the treacherous world of price discovery is often
confusing and sometimes irrational. Handing off $100/head to the packer’s
bottom line is not the result of any wrongdoing on their part, or any
conspiracy, but instead is the result of a combination of forces – some we
have some control over and some we don’t.
The commodity markets have been in rally mode. Complaints earlier this year
of the cattle futures markets being yanked around by global commodities was
true, but is not currently the problem. Cattle have uncoupled from a rally
in most commodities that has seen oil reach a 5 month high and metals rally
to a yearly high and corn this week touch $4/bushel. All this has occurred
while cattle have gone in the tank.
Confidence in the market’s ability to absorb increasing supplies of beef is
at a low point. Futures prices for next year are now approaching $1 a pound
[August of 2017 is $104]. This pessimistic view means more pain for the
cattle industry and squeezed margins with no relief in sight. Recently
purchased inventory is now on stream for large losses following a disastrous
year in 2015. Some of the current fed cattle inventory selling in the mid
$130s were close to a breakeven with a few pens showing a profit.
Futures are on a downward path as some global macro traders make a bet, with
an increasing herd size, the industry will be unable to sustain a prices
level near the current level and prices must fall in order to compete with
chicken and pork. Generally, the positions taken by these type traders are
large and with few longs on the other side, futures tank. That doesn’t mean
they are correct but it does mean the market moves south.
The beef processing companies are gaining leverage as prices fall and can
confuse the market regarding what is the cash price by buying forward into
May and letting those contracts fall into the spot reports. Hedgers cannot
and will not pass some extremely attractive basis offers so we have a cash
market in a freefall. Increasing the numbers of cattle on feed will allow
large slaughter numbers and better plant utilization and widening margins
for the processors in the future.
The new leg down provided by last week’s freefall will cause a major price
realignment among all classes of cattle. This prospect will start to create
financial stress for breeders who have enjoyed a string of profitable years.
Ultimately, the market must find a sustainable level to support all segments
of the industry. This will require structural reform as well as a strategic
campaign to reignite beef demand. Much of the industry’s infrastructure has
changed little in 50 years. Price reporting and a new futures contract are
needed. Price discovery must be open and transparent so all participants can
see and understand the market signals.
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||1,091.48||145.53
|Cost of Gain 600 pounds||494.22||0.82
|Estimated Interest(Prime + 1%)||29.92||
|Net Profit / Loss||-105.22||-7.79
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||1,425.00||190.00
|Cost of Gain 600 pounds||494.27||0.82
|Estimated Interest(Prime + 1%)||30.92||
|Current Texas Panhandle Cash||1,714.64||127.01
|Net Profit / Loss||-235.56||-17.45
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