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December 21, 2014  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

  

PLAINS MARKET TALK

 

There was a lot of daylight between the highest trade price on cattle futures and the lowest trade price. In the short period since the beginning of the month, volatility has been the defining characteristic of futures trading in cattle. It has been a month of extremes. see this week's editorial on the topic

 

Packers took advantage of the chaos to pick off as many cattle as they could before live cattle futures locked limit up. Weekly sales have ranged from a high of $160 on Tuesday down to mostly $157-158 mid week then recovery to $160 in late week trading.

 

One overlooked change during the turmoil in the livestock markets last week was the change in the basis. The $2 over the top bids disappeared. The $3 over December futures also were gone. At week's end cattle were trading par to the expiring December futures.

 

Box prices featured the customary Friday cleanup as choice cuts fell $3. Retailers are sensing an opportunity to replenish depleted inventories with much cheaper cuts. Traders are looking for a bottoming of the box prices in the current trading range. Choice box prices were quoted at $239 with select at $230 and the spread at $9.

 

A major realignment is occurring in feeder cattle prices. Futures prices for feeder cattle recovered from the free fall but settled a long ways from the trade level of two weeks ago. The cash markets in stocker and feeder cattle were $10-20 lower with some undesirable classes struggling to find a market at any price. 

 

Overpricing in the feeder arena has been caused by competition among cattle feeders with much feeding capacity and too few cattle. This condition is not going to change with a calendar change to a new year. Competition will remain intense as feedlots fight over still tight supplies of feeder cattle. The feeder index remains well above futures but is falling. A 750# steer is selling for $220 in the southern plains.

 

Corn prices were flat at week's end. Farmer selling has remained light as most farmers will consider tax considerations by marketing grain after year end. The corn basis in Guymon, Oklahoma is currently quoted at +$.40 over the March contract. Corn is now pricing into rations at $8.50 cwt. in the Oklahoma Panhandle.

 

REBALANCING THE INDEX FUNDS

 

Index funds provide large corporations with a vehicle for protecting inflation risks. The index funds offer a one stop shopping cart through the purchase of the index fund -- allowing companies and individuals a hedge against rising commodity prices. The index fund then goes into the futures market and purchases a basket of well defined commodities assigning a certain allocation to each commodity.

 

Ag commodities are part of the mix and cattle and corn are prominent in the mix. At the beginning of 2014 a index fund might allocation 20% of the fund to cattle and another 20% to corn. The funds examine the allocations at year end to assure they are maintaining the proper percentages of each commodity in the fund.

 

In the past year, cattle have risen sharply and corn has declined sharply. This creates a need for the funds to rebalance and sell cattle positions and purchase corn positions in order to maintain the proper percentages. This anomaly operating outside any fundamental considerations in the marketplace has contributed to the recent decline in cattle and rally in corn.

 

Touching the extremes in the cattle markets

 

A banker friend dropped by this week to report a recent visit the first of December to a local brokerage firm. the banker suggested to the broker that he was interested in selling short some cattle futures. The broker challenged him for justification of the proposed trade. The banker said he had no data -- only a hunch that cattle had gotten too high.

 

The banker was not alone in his hunch and unfortunately was talked out of a short position by the broker. Insiders and outsiders alike have been feeling a market decline was overdue. In a short two week period the evidence was on the table. After touching all time market highs of $173, fed cattle prices dropped to $157 this past week rebounding to $160 on Friday. February live cattle traded at $172 two week ago and traded as low as $155 this past week. January feeder cattle, trading at $235 the first of the month, fell to $212 this past week. And finally, during this time frame, box prices moved from $255 to the current quote of $238 on the choice cutout.

 

Some described the markets as panic selling. There certainly was an emotional edge and reason took a back seat to many trade decisions. There also was a practical side to the price movements. Bankers pressured many operators who had lapsed in their risk management programs, having been stung time and time again by new market highs, to seek protection. Seeking protection, when the markets are unavailable from limit down moves, is not an option. The cumulative effect of a market not responding to trader's needs, is over-reaction. Finally, when the limits were expanded and the selling exhausted, new buying entered the market and the markets shot higher.

 

A collapse in any market spells opportunity for some in the marketplace. Processors and retailers who have been living hand to mouth with limited cattle supplies saw a price level $30 cwt. lower than recent $173 prices. Even some food service and foreign importers of U.S. beef viewed the drop as a price opportunity.

 

The recent price action was a reminder that prices can go down as quickly as they went up. Red ink can be right around the corner. It also was a text book example of markets over-reacting. When all the dust settles from the recent turmoil and shake out, markets will return to fundamentals. Beef will remain in short supply for most of 2015 but competing meats will be expanding supply and there will be more chicken and pork. But lower gas prices and a improving economy will keep demand for beef on the consumer's radar.

 

 

 

 

 

FEEDER MATRIX

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 Steer1,651.13220.15
Cost of Gain 600 pounds495.800.83
Estimated Interest(Prime + 1%)38.93 
Current Breakeven2,180.97161.55
Current Futures2,058.75152.50
Net Profit / Loss-122.22-9.05

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 ago1,612.50215.00
Cost of Gain 600 pounds518.830.86
Estimated Interest(Prime + 1%)32.69 
Resulting Breakeven2,164.02160.30
Current Texas Panhandle Cash2,209.68163.68
Net Profit / Loss45.663.38

 

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