April 24, 2014
CATTLE MARKET REPORT AND ANALYSIS
Short positions in the expiring April contract might watch
out. Commercial longs or packers might not be ready to close long positions
opting for letting $143-144 cattle come to them. The unusually wide basis of
the past month will at some point narrow and the current market might be the
catalyst for it to happen.
Packers are seeing opportunity on the doorstep with rising
beef prices and pressures on cash cattle. The object of this week's trading
will be to raise beef prices without raising live cattle prices. Early bids
of $142-144 in the south and $232 in the beef in the north failed to attract any sellers. Futures prices rose
again in response to higher box prices and firm asking prices from cattle
owners. Most cattle remain priced $5 over April futures. Box prices have
added $5 this week.
Managing the slaughter number will be key to the market in
the next few weeks. This weeks slaughter is currently running under last
week's paltry 563,000 cattle. This will change by week's end and is expected
to be over 580,000 cattle. Packers are ready and willing to ramp up the
slaughter but want to be careful not to pull forward too many supplies from
the feedlots putting the feeder back in control of price.
Box prices continued higher at mid week adding $6 so far
this week. Packer margins are pushing into the black and they will hope to
hold all of the gains for their own pocketbook. Retailers will need to gear
up for Memorial day and spring features for outdoor grilling.
Choice box prices were quoted $1 higher at $232 for choice and select $1
higher at $221. The choice/select spread is $11.
Replacement supplies are tight and this is squeezing
margins at the feedlot where rising corn prices are combined with rising
feeder cattle prices. Feeder contracts are the most lightly traded contract
in the livestock complex. Lightly traded translates into volatility. When
speculators want a position in the market they will necessarily force the
market higher and sometimes in the extreme. There are a few less commercial
hedgers in the feeder cattle due to futures losses this year on hedged
feeder cattle positions. People always back away from hedges after taking a
loss. Prices were generally firm to $2 higher on
replacement offerings. A 750# feeder steer was costing $180 in the plains.
A quick look at the year ago price comparisons for feeder
cattle tells the story of replacement costs. A year ago a 750# feeder steer
was selling close to $130 and today close to $180. The $/head today is $1350.
Operators at every level are tallying the $/head and especially the bankers.
The value of a 750# steer has increased $350/head over prior year. Time
is not long past when $350 bought a pretty decent feeder steer.
Corn prices are trading on the top side of $5/bushel on
all summer contracts. World crop
production for corn is expanding and conditions are good for planting in the corn
belt this year.
The basis is 65 cents
over March corn for Guymon
Oklahoma. Corn is pricing into most rations at $10.00
cwt. in the southern plains.
A MUTUAL INTERDEPENDENCE
Suspicion and distrust are not unusual words used by one
party to characterize the opposing party in cattle price transactions that
are at the heart of every week's business. Whether your interest are at the
feedlot level or the beef processing level, weekly changes in fed cattle
prices favor or disfavor one of the parties. This weekly conflict belies a
greater need for each -- that both the cattle feeder and the beef processor
prosper and continue in business.
At no time has this relationship been tested more than the
recent couple of years of record breaking grain prices and downsizing of the
national cattle herd. Downsizing has meant coping with oversized facilities
built for another time when cattle were plentiful. Over capacity means
forced reduction of both processing plants and feeding capacities.
Downsizing hurts and losing money over prolonged periods is painful whether
you are in the beef plant or the feedlot.
The tug of war between fed cattle offerings and demand for
beef is a complex matrix and just when someone believes they have figured it
out, a surprise in the marketplace surfaces that changes it all. Demand for
beef has been slow to develop this spring and some feel it is on the way.
Processors have pared back the slaughter to record low levels because of
negative margins. Supplies of fed cattle are increasing and the balance
between increasing supplies and increasing demand will feature a new price
point. No one knows how that will play out.
Packers successfully lowered input cost this past week
while at the same time raising box prices. This happened by reducing the
slaughter. The match up is fairly simple. Cattle feeders can refuse lower
bids and force higher prices at will for any given week. The problem is the
next week and the next. If they refuse lower bids and only sell a few cattle
at higher prices then they carryover more cattle and so on until numbers
build and they are compelled to sell rather than suffer overweight
This tension between supplies and demand is constantly at
work. The ideal situation of both processor and feeder profiting is rarely
at work or if it is at work -- not for long. Typical cycles are for one of
the parties to be profiting while the other is suffering. The last either
would want is for the other party to lose money for such a prolonged period
that they go out of business.
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.
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.
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