FEBRUARY 6, 2015  

                    

    CATTLE MARKET REPORT AND ANALYSIS

  

PLAINS MARKET TALK

 

 

A downturn in the cutout and falling stock and oil prices sweep the cattle futures lower causing packers to back up bids and leaving most trading incomplete at the end of the day. Some light trade occurred in the north at $136 live and $210 in the beef -- roughly steady with last week.

 

Box prices fell at week's end and the recap on the weekly slaughter was set at 538,000 cattle down from 568,000 the previous two weeks. Disappointment in seeing the slaughter rate drop and the box prices fall at the same time -- not a good combination. Weather is always a factor in the winter when beef movement both live and dressed struggle to keep commerce alive stocking both the beef plants and the retail stores. Transportation is almost entirely by truck and highways are sometimes closed or almost impassible from the impacts of mother nature. The choice cutout was quoted down $2 at $220 with select at $216 leaving the spread at $4. 

 

Retail prices of beef are little changed from prior year as many retail stores hang on to generous margins and competition among the stores fails to compel lower prices. One factor is the concentration in the grocery sector. The days when hundreds of small regional markets dominated the food distribution and marketing profile has been replaced by behemoth national chains with stores from coast to coast. Seemingly different companies like Vons and Safeway are often connected at the top by a larger Albertsons. This concentrations is not good for competition and is also not good for beef merchandizing when the industry is struggling to regain market share.

 

The days when feeder futures and live cattle futures moved higher or lower at about the same percent seem to be concluding. Feeder futures have lost ground to live cattle futures as reduced feeding capacities are finally restoring some margins to the business of feeding cattle. The month on month decline in placements has resulted in many feedyards with empty pens but a changed operating strategy. The buyers are interested only in purchases that afford a margin and most buyers are laying off the risk as they buy. Cash prices for yearlings in the 750-800# weight range are moving to the lower $150s.

 

Corn futures softened after several days of inching higher. Some weather forecasts are calling for drier than normal weather this summer. The corn basis in Guymon, Oklahoma is currently quoted at +$.40 over the March contract. Corn is now pricing into rations at just above $7.25 cwt. in the Oklahoma Panhandle.

 

 

 

CHASING THE ELUSIVE CASH MARKETS

 

No problem has remained front and center any more than the loss of reported cash markets. The charts demonstrating this phenomena have been shown over and over and there remains little disagreement over the trend and current status of our cash markets. Traders wanting to enter the cattle futures markets are discouraged from doing so because they are unable to understand how it works or see the cash markets the futures are referencing. A trader in the futures was able to see maybe reports of maybe 1000 head as of Friday morning this past week. This causes liquidity in the contracts to dry up and volatility to increase.

 

Restoring the reporting of cash markets is no easy fix. Cash markets continue to exist and of the 450,000 cattle slaughtered each week, about half go to market under negotiated transactions. The problem is only about 10% of these are reported. The balance are thrown into pools of trades classified as formula trades and combined in reports that almost impossible to decipher.

 

There are several efforts underway to remedy this important problem.

 

Live fed cattle auctions. The internet has provided the world with the tools to bring trading to the web and the cattle industry has been slow to embrace these new technologies that can provide not only simple trade matching through live auctions but trade standards for electronic settlement and clearing of those transactions.

 

Rule changes at USDA's Mandatory Price Reporting. The cattle industry has yet to present suggested changes to an outmoded reporting system. Both pork and poultry send suggested changes to reporting and they were quickly adopted by USDA. The associations coupled with the beef processing companies need to draft and submit agreed suggested changes.

 

Appoint a trusted third party to construct a cash index. It is possible to take the current MPR reports and after the fact to construct a cash index number. The cash index would be built from formula results, negotiated grid results, basis trades, and dressed sales which would all be compiled into an index based on standard carcass yields and standard premiums and discounts.

 

The common denominator for all cattle transactions is a dressed price for the beef carcass at a beef plant. The packer buyer who is negotiating a live transaction at a feedyard is turning in a dressed profile for the purchase to the plant and is judged over how accurately he or she forecasts the dressed results. The most rational end result for all trading is a dressed base for a YG3 Choice carcass and that particular plants premiums and discounts designed to attract the type beef they want to process.

 

 

 

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 Steer1,149.60153.28
Cost of Gain 600 pounds465.400.78
Estimated Interest(Prime + 1%)30.83 
Current Breakeven1,640.09121.49
Current Futures1,622.70120.20
Net Profit / Loss-17.39-1.29

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 ago1,575.00210.00
Cost of Gain 600 pounds524.690.87
Estimated Interest(Prime + 1%)33.98 
Resulting Breakeven2,133.67158.05
Current Texas Panhandle Cash1,861.11137.86
Net Profit / Loss-272.56-20.19

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