July 28, 2015  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

  

PLAINS MARKET TALK


The rout of the Chinese stock market cast a pall over the commodity markets. The downgrading of the Chinese economy will place a damper on beef exports to China -- the fastest growing destination for US beef.

 

Futures struggled all day yesterday to find direction alternating between rallies that were dashed by a new influx in sellers. In the end, the bears won and futures tumbled. This morning the futures changed course and rallied but the deferred months failed to participate as traders look for large placements this fall to weigh on prices early next year.

 

Show lists expanded beyond last week and in a newly developing trend above last year. Cattle owners will be on the defensive this week but a short term rally in futures might provide the cover for finding some optimism that prices will stop the uninterrupted fall. Bids of $1.50 over the top were offered in most locations. Beginning asking prices were mostly at $146-148.

 

Beef prices following two very light slaughter weeks managed to work higher. The slaughter rate this week also is expected to remain at or below the past two weeks. Some good news that retailers are planning beef features for August may allow enough demand improvement to start working off what appears to be a backlog in the feedlots. The cutout gained a dollar to $232 for choice cuts and select at $229. The choice/select spread is currently $3. Choice cuts are now $20 under prior year.

 

With all the negative news, the replacement market took the biggest hit of the year. A large video auction witnessed much of the inventory passed out and the few sales reported were dollars lower. The new price list hit all classes and weights of cattle with many transactions posting $10-20 cwt. lower prices. Yearlings weighing between 750-850# were selling from $200-215. Light stocker calves with many of them weaned lost 3 as a first number and moved at $250-290.

 

Much of the decline in live cattle futures has been in the deferred months as traders anticipate bunching of placements this fall setting the stage for sharply lower fed prices next year. This has caused forward sales of feeder cattle to slow. Most feeder cattle sold in current market conditions will post losses and some large.

 

Improved crop conditions and rain where needed and dryness where needed caused a large drop in corn prices. It also caused some firmness in the basis. Corn fell almost 20 cents a bushel and is headed in the direction of the season lows. The corn basis in Guymon, Oklahoma is currently quoted at +$.60 over the September contract. Corn is now pricing into rations at $7.80 cwt. in the Oklahoma Panhandle.

 

BEEF IS BACK CAMPAIGN

 

The USDA July 1st cattle on feed report will be remembered mainly in future graphs as illustrative of the bottoming of cattle on feed numbers and the beginning of increasing numbers of cattle placed on feed to be available for market at a later date. It also is a good starting point for the industry to begin efforts to make the public aware that "beef is back" and to expect larger supplies in the future that will be characterized by MORE BEEF AT CHEAPER PRICES.

 

If by some act of magic, we were able to deliver a normalized slaughter of 650,000 cattle to the marketplace today, it would be a disaster taking the live market under $1/pound. The marketplace is not prepared to accept more beef. During the past two weeks of 538/539,000 head slaughter, the beef cutout has done little more than lose additional ground. Grocers are concentrating on generous margins generated by pork. Food service businesses have dropped off several beef options from menus and substituted cheaper alternative meat options.

 

It doesn't take a genius to recognize that material work on the part of the industry is necessary to prepare the ground work necessary to prepare the food service businesses for the return of beef. This will require winning over retailers and restaurants to the fact that not only is beef the preferred meat but those handling beef can do so at a profit.

 

Many of those involve in beef production currently question the fact that people can make money producing beef. Except for the breeder, all sectors in the beef pipeline are losing money currently. The short supplies of the past two years, now aggravated by holding back breeder heifers, has taken a toll on each sector as competition has kept input cost out of line with the final value recognized at each point of sale.

 

The bunching of placements expected in late summer and fall will thrown additional supplies on a market early next year and the marketplace is not ready to absorb increasing numbers of cattle without structural changes. American business is too often characterized by short term thinking and the criticism is a fair one. The beef industry needs to reach the decision makers at the top of the many corporations that depend on beef as a source input to their food offerings. It is only when menus change and beef features are commonplace that the marketplace will be able to accept the building supplies without a major disruption to price.

 

 

 

 

FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES

 

Readers have been sending notes regarding breakeven projections. One commenter ask how we could use 80 cents for a cost of gain when everyone knows that is too low. Another ask why we are using such a high cost of gain number. The two emails illustrate the difficulty of providing one benchmark for all regions of the country. Currently a typical bases in the corn belt might be $1 under the futures and alternatively a corn basis in Hereford, Texas might be $1 over the futures. The northern feeders have much cheaper grain and more expensive feeder cattle. A more meaningful report would include one breakeven and close out for each major region. It also is difficult maintaining the tables when both fed and replacement prices are changing in $5-10 cwt. price blocks.

 

 

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 Steer1,587.75211.70
Cost of Gain 600 pounds471.980.79
Estimated Interest(Prime + 1%)37.39 
Current Breakeven2,092.47155.00
Current Futures2,002.05148.30
Net Profit / Loss-90.42-6.70

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 ago1,590.00212.00
Cost of Gain 600 pounds539.880.90
Estimated Interest(Prime + 1%)32.49 
Resulting Breakeven2,162.37160.18
Current Texas Panhandle Cash1,993.41147.66
Net Profit / Loss-168.96-12.52

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