July 21, 2014
CATTLE MARKET REPORT AND ANALYSIS
Show lists are expected to be manageable this week and
cattle owners will press asking prices back to $160. The slaughter rate
remained static with the beef plants killing around 575,000 cattle the past
two week -- the number shortened by a reduced cow kill. The drop credits on
cattle moved to an all time high of something over $200 per head.
Sometimes things not said are as important as things said.
This past week the transactions and positions established by packers and NOT
reported were more important than the reported transactions. Instead of
pushing the spot cash market higher at the end of last week, packers moved
purchases into the out weeks. The were willing to purchase additional cattle
at steady money of $157 live and $247 in the beef through the end of the
month and into the first week in August. Trades also included cattle in
Texas and Kansas at $7 over the August board.
Choice box prices turned lower at week's end.
Balancing slaughter levels to current fed supplies is tricky as all segments
of the beef pipeline begin to adjust to new pricing levels in the stores.
Quality grades across the nation were running several percent higher than
last year. Choice box prices
were quoted at $248.50 with select
at $242.50. The choice/select spread is $6.
The monthly cattle on feed report will show June
placements slightly under prior year but July's decline will be more
dramatic. The grass is green currently and the offerings of cattle are
scarce and feedyard occupancies will decline as feedlots sell but do not
replace. There will be some increased placement number this fall. Some of
this summers decline in placements into feedyards has been middle weight
cattle sent to grass.
The replacement market last week suffered the first
decline in almost three months. Yearlings were $4-5 lower while calves fell
$5-10 lower. Receipts were smaller at auctions across the country but video
sales provided a broad outlet for many of the fall consignments. Heifer
placements on feed have declined rapidly as more breeders are held for calf
production. While the herd can not increase with the speed of the other
meats, rebuilding is moving forward at full force motivated by the oldest
and most effective stimulus -- price.
Corn price continue the downward spiral. Overnight trading
Sunday night pushed corn another 7 cents lower. This pushes many corn
producers into losses on this year's crop. Ideal growing
conditions and good crop development has corn on track for a bountiful crop
and the normal summer crop scare is looming more remote as each day passes.
Three quarters of the crop is rated good to excellent. Corn is offered at $1 over the
September contract basis Guymon Oklahoma. Corn is now pricing into rations
at $8.75 on the southern plains.
INTRODUCING THE COMMERCIAL LONG HEDGER
The movement to the current elevated cattle prices is
something most trade participants viewed as a isolated and temporary
phenomena. Cattle owners and beef processors are a wary lot. They watched
the price spike after the first of the year -- sometimes with doubt and
disbelief. Most viewed the spike as temporary and have been awaiting more
normalized seasonal price patterns to prick what some regard as a price
bubble. After all, few believed beef could move through the pipeline at
these elevated prices without a consumer backlash.
The speculative longs in the cattle market took a hit in
2013 when hopes that prices would reach $140 were denied and instead prices
traded in the $120 level for much of that year. Technical traders have been
short much of this year and sell signal after sell signal by the charts has
resulted in major damage to traders who live by the language of "key
reversals", "head and shoulder patterns", "moving averages" and other
esoteric price interpretations.
The loss of many of the speculative long traders in the
cattle futures market has resulted in an discounted price structure on all
futures - spot and deferred. This has been a windfall for hedged feeders who
have capitalized on unexpectedly large premium basises. The current futures
price structure is set to attract a new clientele to the market -- the
commercial long hedger.
Beef packers willing to step out into August and pay $7
premiums for a basis to the August board also might choose to protect price
by buying the August board. The August contract settling last week at
$151.60 might be an attractive risk management option. Protecting price is a
key component of margin management. The days of leaving all pricing to the
spot week's transactions, both on the buy and the sell side, is living in
Cattle feeders also face a similar situation with feeder
cattle. The spot August contract is selling at $211.57 as of last Friday.
The deferred feeder contracts are flat for the balance of the year then fall
back several dollars per hundred weight early next year. All these prices
are discount to the current cash prices. It is doubtful the cattle feeder
will see increasing numbers of feeder cattle next year. The feeding
companies might find that option attractive and protect some portion of
future inventory for price.
The days of a nice fully protection balanced position
whether in the feedyard or packing plant are gone. They disappeared as
packing plants and feedlots struggle to cope with downsizing facilities to
match the downsized herd. Surviving in the current environment requires
flexibility and adaptability and no small amount of nerve.
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.
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.
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