October 20, 2014  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

  

PLAINS MARKET TALK

 

A calming of fears from Ebola and new buying interest in the cash markets for replacement and fed cattle sent futures higher Monday with some contracts reaching the daily limit. Navigating the treacherous waters of livestock futures is becoming a full time job. This past week witnessed triple digit gains or losses every day of the week with limit moves occurring on most days. Cattle clearly established a justification for the enormous premiums in the "put" and "call" options. Volatility has run amok. Amok is defined as a violent uncontrollable frenzy.

 

An examination of the cash prices for cattle last week would reveal a stable business as usual activity. In fed cattle trading, the prices were steady with little to no change. In the replacement market stocker and feeder prices were a bit more erratic ranging from $5 higher to $5 lower depending on where you are and what day the transactions occurred. Bottom line is nothing dramatic occurred and there was little indication of the turmoil in the futures market where volatility was the watchword.

 

First, all time highs for cattle prices has created a lot of nervousness on the part of market participants. Second, uncertainty about the spread of Ebola has the country sitting on edge waiting to assess further developments. Third, world political stability seems threatened by ISIS and the trouble in the Ukraine. Finally, economic uncertainty in the EU threatens to spread and the global implications are anything but clear. Given this backdrop, no one should be surprised that all markets are nervous and volatility is on the rise.

 

Box prices stabilized at week's end. The weekly slaughter number remained small and beef supplies limited. While supply shortages will encourage switching to pork and poultry, small slaughter numbers will keep beef on a firm footing. Choice box prices held steady and were quoted at $249 with select at $235 and the spread at $14.

 

Demand for replacement cattle continued to be the best in the north. More cattle relative to the regional patterns are being placed on feed in the north. October placements will likely reflect much larger placements in the corn belt than occurring in the southern plains. With Friday's limit move down in feeder futures, most feeders will move to the sidelines waiting out the volatility. Bottom pickers seemed to be picking at some of the feeder futures months as trading wound down for the week and the pools of sell orders dried up.

 

Corn was lower in overnight trading Sunday night. Harvest is in mid steam and the crop is large. Congestion on the railroads continues to plague the availability of repeater trains to deliver corn from the north to the southern plains. In the meantime an open period of warm weather will be ideal for bringing in the crop in the north. Most of the corn in the south is nearing completion. Corn basis Guymon, Oklahoma is currently quoted at +$.50 and declining. Corn is now pricing into rations at $7.00 in the Oklahoma Panhandle.

 

 

WHEN LIQUIDITY FAILS

 

The CME globex trading platform displays the best 5 bids to buy and the best 5 offers to sell and traders can view the "Book" using customized software provided by most brokers. To market participants in the field and not on a computer viewing the Book, the fluctuations in the market for cattle futures prices might seem unfathomable.

 

A closer look at the Book, especially in the feeder cattle futures, provides a clear and understandable explanation. The Book of orders placed on the exchange are simply inadequate to support the entry of larger orders placed on either side of the market. It is not uncommon in the feeder cattle book to find orders for 1 or 2 contracts spaced .25 cents cwt. apart scattered up and down the price chain. The further out in the deferred months the more scattered are the bids and offers sometimes the bid/ask spread is over a dollar.

 

The implications of this poor liquidity is felt by every trader wanting to buy or sell 10 contracts. A 10 contract order entered as a market order [meaning fill at the best available posted price] might move the market $1 to $1.50 dollars. Predatory traders frequent enter low ball limit orders with the objective of filling some naive person who rushes to get filled with a market order.

 

Currently lenders are encouraging stocker operators to be sure they have protection for the high priced inventory they are acquiring. Protecting that inventory can either be done with options or hedged with futures. Option prices are so high as to be unaffordable [however, unaffordable is not a useful statement if the market tanks]. This leaves an outright hedge as a preferred course of action but good execution rests with liquidity.

 

Not helping the situation is the fact that managed futures brokers and hedge funds are pulling out of commodities at a time of economic and political uncertainty. The loss of these major players on both sides of the market is harmful to liquidity.

 

Poor liquidity favors no one. CME recognizes this fact and will be changing and reducing trading hours at the end of this month. It is the hope of the industry that this will improve liquidity and reduce volatility. In the meantime stay tuned for sharp moves up and down in the livestock futures.

 

 

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 Steer1,807.73241.03
Cost of Gain 600 pounds456.090.76
Estimated Interest(Prime + 1%)41.77 
Current Breakeven2,301.09170.45
Current Futures2,226.56164.93
Net Profit / Loss-74.53-5.52

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 ago1,462.50195.00
Cost of Gain 600 pounds523.430.87
Estimated Interest(Prime + 1%)30.11 
Resulting Breakeven2,016.04149.34
Current Texas Panhandle Cash2,214.00164.00
Net Profit / Loss197.9614.66

 

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