April 27, 2015  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

 

  

PLAINS MARKET TALK

 

After finding a temporary bottom last week, fed cash prices moved higher to close the week. Late week sales were mostly at $160-161 live and $257-260 dressed. With the April contract expiring this week, and a deeply discounted June, the spot month, it will be a test of the resilience of the cash markets to establish a base price rather than conceded to the futures.

 

The slaughter last week at 544,000 was up from 533,000 the previous week and 502,000 three weeks ago. Packers are finally in the black on processing margins and they are doing what businesses do when they are profitable -- ramp up. Ramping up means more cattle for slaughter and the last two days of this past week characterized what needing more cattle means for the marketplace. 

 

Friday's USDA Cattle on Feed report was bearish with placements up 5% over pre-release estimates. Placements at 100% of last year might be a surprise to some forecasters but judged by any historic standards is not a large placement number and when examined in the context of the past year, only one monthly placement month has exceeded the previous year. The result of placements of 100% of last year was to leave on feed number also at 100% of last year. The regional changes were the news in this report. Cattle placed on feed are moving north where corn basises are more competitive leaving Texas to lose ground to Nebraska as the top state for fed cattle production.  Placement weights also are moving higher as stocker operators fight the market and put more pounds on the replacement cattle in a struggle to recover their costs on high priced calves placed on pasture last summer and fall. 

 

Box prices were lower Friday as processors clean out the coolers to prepare for this week. The marketplace will test the impact of a larger slaughter and the acceptance of more beef to gauge improvement in demand this spring. Packer want to up the slaughter but this must happen as they are able to manage the input cost of fed cattle and assure increases in slaughter rates don't happen faster than a matching improvement in beef demand. Box prices were quoted $3 lower with the choice cutout at $257 and select at $246. The choice/select spread is widening and currently $11.

 

Feedlots find themselves in somewhat the same position as packers. Just when they foresaw lower replacement costs, futures shot sharply higher. The COF report will temper some enthusiasm for replacement cattle in the upcoming week. There are large offerings of May cattle for sale and most of the cattle are heavy. It is reasonable to assume a continuation of placements of heavy cattle on feed and it is likely the April and May cattle on feed reports will reflect this trend.

 

Some mid May offerings of feeder steers weighing in the mid 800# range are trading $8-10 back of the May board in the southern plains. A handy weight 750# steer will still trade close to par to premium to the May board. Most forward contracts today carry a stop on the upside weights meaning all pounds above the stop are free. This has proven to be a good barometer to gauge the real weight of the cattle. Sellers unwilling to place a stop 50# over the base weight tip their hand to buyers of realistic weight expectations. A 750# feeder steer was selling for $213 in the southern plains.

 

Important and valuable rains across the plains are setting the stage for an optimum beginning for this year's corn crop. Futures prices are moving lower as a strong dollar slows exports. The lower futures combined with an improving basis for feedlots in the southern plains will help cost of gain numbers this summer. The corn basis in Guymon, Oklahoma is currently quoted at +$.55 over the July contract. Corn is now pricing into rations at $7.75 cwt. in the Oklahoma Panhandle.

 

RAISINS, CONFEDERATE FLAGS AND OTHER NONSENSE

 

Few of us have any direct knowledge of the times created by the great depression of the 1930s. We all have heard stories and many of those stories are compelling and represent a time of struggle and perseverance for our nation and its people. Our of the depression and hard times was borne the Agricultural Marketing Agreement of 1937. This was a government program designed to stabilize and subsidize farm prices for farmers struggling to make ends meet and in the rural economy of the time, that was a lot of people. Under the authority of this permanent law and subsequent amendments, marketing orders have been established for milk as well as numerous fruits, vegetables, and specialty crops.

 

One of the crops included in the Act was raisins. This past week the Supreme Court heard arguments of a Fresno, California raisin producer who refuses to turn over a portion of the crop each year to the government so the government can manage the supply of raisins and their price. Under the marketing order the government tells producers how much of their crop they must turn over to the government, that has been as high as 47% in recent years, and the government distributes the raisins as they see fit in order to manage the price of raisins. The Horne family has sued the government saying the Marketing Order is an unconstitutional takings of their property without payment and should be stopped.

 

USDA administrated marketing orders are New Deal era laws that have not been reviewed since the depression and have no business remaining on the books. Other crops such as citrus, milk and cranberries suffer the same fate. The evidence of cost effectiveness of government run programs is well established and it confirms the fact that government's role in the marketplace must be a limited one restricted to monitoring monopolies and restraint of trade issues.

 

In another recent case, the Justices struggle with free speech case over Confederate license plates. In a dispute over a proposed Confederate battle flag license plate, the Supreme Court balanced worries about government censorship and concerns that offensive messages could, at worst, incite violence. Integral to this debate is whether the message on the license plates is individual speech or government speech. The issue is what right does the government have to force individual speech or the content of speech. The implications for the beef industry are significant. Currently the government mandates a check off $ deduction for beef producers in order to advertise and market beef and that has been tested in court and upheld. Redefining the role of government in compelling speech is an important role for the Supreme Court.

 

Saulsbury Orchards sued the almond marketing board and the case ended up in the United States Court of Appeals for the Ninth Circuit, which found that mandatory advertising violated Saulsbury's First Amendment rights of free speech and association. After that decision, dozens of challenges to mandated marketing programs arose in the 1990's. Apples, peaches, plums, grapes, kiwi, a veritable cornucopia of producers challenged the programs, with several cases going to district courts and some reaching the Supreme Court. In 2004, federal appeals courts ruled that three highly successful programs for beef, pork and milk were unconstitutional. But in 2005, the Supreme Court ruled 6-to-3 that beef marketing programs did not violate the First Amendment, as they were considered protected "government speech."

 

Despite the beef case ruling, there are still over 70 cases currently being litigated and the outcomes will probably depend on not only specific details of the marketing programs, but the court level where the decision is reached. The beef industry is best served when the role of government is minimized in directing free market dependent economies.

 

 

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 Steer1,611.75214.90
Cost of Gain 600 pounds500.650.83
Estimated Interest(Prime + 1%)38.17 
Current Breakeven2,145.63158.94
Current Futures2,027.70150.20
Net Profit / Loss-117.93-8.74

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 ago1,725.00230.00
Cost of Gain 600 pounds563.410.94
Estimated Interest(Prime + 1%)35.05 
Resulting Breakeven2,323.46172.11
Current Texas Panhandle Cash2,171.75160.87
Net Profit / Loss-151.71-11.24

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