THE MARKETS

 

 

 

January 18, 2021

 

CATTLE MARKET REPORT AND ANALYSIS

  

 

PLAINS MARKET TALK

 

            

Cash Cattle

 

This week will start with MLK holiday and most markets closed. The end of last week brought cash trading to a halt with higher futures prices and reluctance by cattle owners to sell any cattle at prices that trended lower during the week. The week had featured cash cattle prices working lower as boxed beef prices trended higher -- not an unfamiliar pattern. Sales for last week ranged from $108-111 with most of the lower end of the range in the north on Thursday. Dressed prices ranged from $172-174. All prices are $1-3 lower.

 

Slaughter rates remained steady with last week at 651,000 head -- well above last year at 633,000. Ample supplies of fed cattle are matched with broad demand for beef. The choice cutout was par with last year at $212 but fed prices this year at $110 fell $14 cwt. behind last year's $124 price.

 

Cattle Futures. Futures prices were higher to close the week.

 

The Comprehensive Fed Cattle Weekly Report offers the most current information on the current status of fed cattle being harvested. The report is published each Tuesday and includes the previous week's change in carcass weights and quality grading. The latest report shows carcass weights up 3# at 893# which is 11# over last year. Quality grade grading was up .6 at 82.90%. This was the third highest grading percentage in history. Seasonally grading reaches its peak in February.

 

Forward Cattle Contracts:  Forward contracts will always bear some relationship to the corresponding futures month closest to the delivery month for the cattle. Basis levels will move up and down as processors want to add to forward contracts or not. Sometimes the forward contracts are associated with forward sales of beef and sometimes not. Packers may simply try to add an extra margin for taking the price risk off the hands of the producer. 

 

Weekly graphs on the Comprehensive Weekly Fed Cattle Report break down the categories of trade for the week according to 1) formula cattle; 2) negotiated live; 3) negotiated dressed; 4) and forward contracts. Some cattle included in the formula category are week to week negotiated grids and not committed cattle to one plant. Other cattle designated as formula are "over the tops".

 

The Cutout. Box prices moved higher for the week. The choice/select spread has narrowed as it does seasonally. This past week's slaughter was 651,000 topping last year by 5000 head but topping beef tonnage by more because of larger slaughter weights.

 


 
Choice CutoutChoice Price Change
215.04Up $2.12
 
Select CutoutSelect Price Change
205.84Up $2.76
 

 


 

 

 

Beef Feature Activity Index. Retailers as custodians of the bulk of food distribution will attempt to feature beef cuts that are popular winter fare. Grocers would like to hold on to the meat margins caused by stay at home orders, but as vaccinations increase and hotel/restaurant service is restored, the market will become segmented.

 

 

Replacement markets

 

The large supplies of fed cattle coming to market is putting a lid on fed prices and making buyers of replacement cattle more cautious. Runaway feed costs is joining the pressure on stocker and feeder prices. Rains across east and south Texas areas expanded to the north providing rain and snow across much of the eastern United States. Drought areas remain in the southwest. Three months of smallers feedyard placements will leave empty pens looking for cattle, but failing futures will make buyers cautious.

 

Oklahoma City. The auction markets pushed higher with most classes of cattle gaining $2-5. Steer offerings managed to hold better gains than their heifer mates.

 

Feeder Cattle Futures. Feeder futures were sharply higher in end of the week trading.

 

Feeder Cattle Cash Index. The index is tracking the moves in cash prices.   

 

Forward cattle contracting. Feedlots, with much uncertainty about feed costs, are becoming reluctant to be active in the forward markets or are lowering their basis bids. Stockers operators are making regular inquiries about basis levels in the hopes of pricing cattle that will hold margins together.

 

National Weekly Feeder Summary released on Friday of each week tracks the national prices by region for last week.   

 

Grain Futures. Corn may have found an temporary top at week's end. The USDA report shocking the market with a huge yield reduction sent corn sharply higher. Basis levels are somewhat weaker. Current basis trades are for JFM corn at 85 over the December board in Guymon, Oklahoma. Corn is now pricing into ration at $10.75 cwt. in the Oklahoma Panhandle.

 

 

 

THE GAME CHANGER  

 

No year passes without ups and downs in feed prices. These are generally caused by price signals from supply or demand changes intended to cause a market response. Corn is a commodity with lots of depth because of its size and the various uses. The market is very liquid and enjoys broad participation from a large pool of commercial and speculative traders. The shock to markets from the recent skyrocketing prices will have broad implications reaching far beyond CME futures.

 

Cattle operations depend on corn and corn by products for the lion’s share of their feed needs. Most feedyards acquire corn through an agreed “basis” to corn futures market then, price the corn at will. Basis levels this year in the southern plains have been especially high due to drought and reduced acres that have moved to cotton. Corn is the major component of feed rations and the overwhelming determinative factor is cost of gain for cattle.

 

Corn prices have moved from $3.40/bushel in August to near $5.40/bushel currently. The increase has been driven by several factors including heavy buying by the Chinese, threats to the South American crop, inflation speculation, and most recently a dramatic reduction in domestic supplies caused by a USDA report dropping last year’s corn yields by 3.8 bushels – the third largest reduction in reporting history. The impact will be a game changer for all meats.

 

Cattle operations will encounter significant changes. First and foremost, will be the rise in cost of each pound added to the weight of the animal in the feedyard and to a less extent on pasture through supplemental feed. Close outs in the $.70s and $.80s on cost of gain will quickly move to well over a dollar. Incremental pounds during the final phase of finishing will reach $1.25-$1.50/pound gained. This will encourage the placement of heavier cattle leaving lighter cattle for grow yards or grazing where less grain is used and forage cost are lower.

 

Marketing plans for cattle from the feedyard will change. A tug of war will develop between cattle owners interested in pushing cattle to market rather than suffer economic losses by adding more weight, and processors who need more weight and time on feed to reach the desired quality grades. Processors will need to provide sufficient premiums to attract more cattle into the heavier high grading categories. The choice/select spreads should widen to encourage longer feeding periods. Placement patterns also will change as less cattle are fed in the corn belt with some farmers choosing to sell corn rather than market it through cattle.

 

Ultimately, higher prices for corn will incentivize farmers to allocate more acres to corn. Cotton gins will be disappointed this coming crop year as farmers on the southern plains switch from cotton to corn or milo. The anticipated increase in corn acres will cause new crop corn futures to fall and create a negative carry in the current corn in inventory at grain elevators and on farm storage. The prospect of lower prices in the future will encourage more farmers to sell now and those pressures will lower the corn “basis”.  The combination of inflation pressures and high feed costs will make it likely that all meat prices are due to rise.

 

 

CATTLE REPORT LIBRARY

 

Below are links to articles published in the Cattle Report pertaining to industry change. Two important changes are on the table for progress -- supply chain management and animal ID. Both applications will transform and disrupt the industry.

 

THE BEEF BLOCKCHAIN

 

THE BEEF BLOCKCHAIN SLIDE SHOW

 

The Case for National ID for Cattle

 

Reforming the Futures Contract and Cash Trading of Cattle

 

 

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 Steer1,009.35134.58
Cost of Gain 600 pounds638.191.06
Estimated Interest(Prime + 1%)27.10 
Current Breakeven1,668.35123.58
Current Futures1,579.91117.03
Net Profit / Loss-88.44-6.55

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 ago975.00130.00
Cost of Gain 600 pounds571.180.95
Estimated Interest(Prime + 1%)22.02 
Resulting Breakeven1,568.20116.16
Current Texas Panhandle Cash1,510.92111.92
Net Profit / Loss-57.28-4.24

 

 

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