APRIL 28, 2016 

                    

    CATTLE MARKET REPORT AND ANALYSIS

  

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.

 

Carcass weights 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.

 

Forward Cattle 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 CutoutChoice Price Change
214.81Down $3.76
 
Select CutoutSelect Price Change
205.59Down $4.79
 
Choice/Select Spread
9.22

 

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.  

 

The National Weekly Feeder Summary tracks the national prices by region for last week.   

 

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 Oklahoma Panhandle.

 

 

 

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 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 Steer1,091.48145.53
Cost of Gain 600 pounds494.220.82
Estimated Interest(Prime + 1%)29.92 
Current Breakeven1,609.53119.22
Current Futures1,504.31111.43
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.

INPUTSTOTAL$$CWT
750 # Feeder Steer OKC 150 days ago1,425.00190.00
Cost of Gain 600 pounds494.270.82
Estimated Interest(Prime + 1%)30.92 
Resulting Breakeven1,950.19144.46
Current Texas Panhandle Cash1,714.64127.01
Net Profit / Loss-235.56-17.45

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