PLAINS MARKET TALK
Cash Cattle. This story has replayed over and over this year. Optimism
in the cash markets has been dashed by falling futures. Cattle owners are
less willing this week to give up the ghost and cave to bids. Packers
opening bids were $185 dressed in the north but with declining futures those
bids were raised to $186 yesterday -- steady to a little higher than the
bulk of last weeks trade. In the south $114 bids firmed to $117 by late day.
Virtually no cattle have traded for the week except one pen yesterday in
Iowa at $118 live. Most asking prices are $120 and higher.
It is always interesting to read and interpret price forecasts for cattle.
Several commentators are reporting that prices for cattle are expected to
move back to the mid to upper $120s in the next couple months. Knowing and
understanding the basis for those comments is puzzling. Any commentator can
express their opinion on price but broadening the statement to include "we"
confuses matters. The marketplace built on futures contracts is forecasting
a price $10 cwt. back of those predictions. Of course, anyone believing
their forecast can buy futures and return a handsome profit.
Cattle Futures. Following stronger prices during most of the trading
session, the last hour saw futures crash and most contracts lose over a
dollar. The ups and downs of the past few months have resulted in both
observers and traders on pins and needles waiting for the next big fall out.
Past rallies have fizzled and the direction for two years has been down with
only temporary interruptions. The monthly highs set by August and October on
Wednesday were replaced with the lower closes leaving many to see today
price action as culmination of a wild month in cattle futures trading.
are released each Thursday and will be a closely watched barometer
indicating the position of cattle feeders in the nation's feedlots. The last
released for the week of July, 16th had carcass weights up 5# to 880#
remaining below last year. Seasonally, carcass weights should increase until next winter. The important references will be
comparing carcass weights this year with last and determining how those
weights impact overall tonnage when compared to prior year.
Contracts: With the long sustained positive basis to the futures,
there is little interest on the part of feeders to forward contract cattle
anywhere close to par with the deferred futures. Cattle feeders who have
already priced the basis of cattle forward but not yet picked a price point
are stuck with a quite low price to the current cash.
The weekly breakdown of fed cattle moving to the beef processing plants is
as follows. 1) formulas 55%; 2) negotiated 20%; 3) forward contracts 25%.
The Cutout. Box prices were lower towards week's end but found good
support at the lower end of the week's trading range. The good news about
the past couple of weeks has been sales volumes that have sustained a weekly
slaughter in the 600,000 head range. Cooler weather might stimulate both
some new beef features in the stores and more consumer interest in beef
products that typically do not sell well during periods of extreme heat.
The cow slaughter has remained consistently above prior
year. Heifer placements are increasing in the nation's feedyards and all
indications are that the ramp up in the nation's cow herd is concluding.
|Choice Cutout||Choice Price Change
|Select Cutout||Select Price Change
Oklahoma City. Prices were higher on all classes of stocker and feeder
cattle at auction. Receipts were light given the recent temperatures, many
operators chose not to move cattle around. The developments in the fed
market will determine the sustainability of the higher prices for
August normally features heavy movements in certain
grazing areas of the country. The Osage and the Flint Hills are two areas
when yearling cattle move to market. Many of the cattle placed on pasture in
these areas are short yearlings weighing 600# and marketing weights
frequently exceed 900#. The new feeder contract will move the weight up to
800# in November as the national standard weight.
Feeder futures tumbled following the lead of the live cattle. The feeder
contract always shows more volatility both up and down because of the poor
liquidity in the contract.
Feeder Cattle Cash Index. The index that has been trading premium to the
August board is narrowing the gap and currently trading close to par with
the August contract. Basis trades off
the October contract vary for July from -$1 to +1 for a 775# steer. In
November the contract moves to a 800# base weight.
Weekly Feeder Summary released on Friday of each week tracks the
national prices by region for last week.
Corn futures. Grain futures resumed the downward track in late week
trading. Moisture will finish the corn crop for many areas and crop risk now
finds corn at a low point for the season. Quotes
over the September are around +40 cents in Guymon
Oklahoma down from .60 over last year. Corn is now pricing into rations at $6.50
cwt. in the Oklahoma Panhandle compared to wheat at $6.00 cwt..
TRADING IN THE FEEDER CATTLE ARENA
The recent focus for reform has concentrated on the live
cattle contract where significant impairments to the contract exist and are
driving traders away. Little mentioned is the fact that the feeder contract
is also troubled and those operations relying on price protection in this
market are finding a marketplace that is barely hanging on and a liquidity
pool that is drying up. Open interest in the feeder contract is a small
fraction of the live cattle contract and live cattle contract is a small
spot on the wall when compared to some of the larger CME contracts like the
The feeder contract differs from the live cattle contract
in that the contract is a cash settled contract. CME has created an index
whose construction depends on publicly available information pulled from
USDA feeder cattle market reports. Some of those markets are public auctions
and the prices are open and available for all to see. Other transactions in
the index are taken from USDA reports using telephone calls to some of the
feeding companies asking for purchase information on recent transactions.
The sell side of each transaction is not confirmed with stocker or breeder
When users of the CME feeder futures make their way to the
futures marketplace, they will find a sparsely populated order book. The
spot month will have more orders listed with smaller spreads but when
trading in the deferred contracts out 6 month or more, few orders exist and
most are 1s or 2s and often the spread is .50 cwt. apart. Even in the spot
contract, it is unusual to find a order greater than 5 contracts. The result
is anyone putting on a position or taking one off involving 10-20 loads will
soon find they are moving the market over a dollar with a small volume.
Breeders and stocker operators need a viable futures
market. Grazing seasons, lasting 6 month or more, involve the purchase of
new stock for the grazing venture then sometimes laying off some of the risk
on the grazing venture. While laying off the price risk is only part of the
transaction, it is an important component. Weather, animal health, care and
other variables will always be changing but price protection is at the top
of the list.
The feeder contract would benefit from an industry wide
Blockchain that would share without attribution the thousands of
transactions going into the daily, weekly and monthly transfers of ownership
of replacement cattle. An index could be created relying on the shared or
distributed data in the Blockchain giving all participants confidence in the
cash settlement price. Weighted averages could be created for regions of the
country giving guidance for basis transactions to occur. Finally all the
information would be verifiable and auditable but each parties own
proprietary information protected.
The feeder contract suffers from the same impairment as
the live cattle contract -- poor liquidity. An improvement to the cash
settlement index would bring new traders and speculators to the market and
an improved market book to the contract. Traders are looking for any market
they can see and understand. This means they can develop their own theories
of price direction and not be worried about getting in and out of the
position because of poor liquidity.
NOTE TO READERS
Sections of the newsletter are redesigned with hyperlinks
to the appropriate source pages. The hyperlinks are in light blue within the
FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE
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
|750 # Feeder Steer||1,052.48||140.33
|Cost of Gain 600 pounds||449.45||0.75
|Estimated Interest(Prime + 1%)||28.52||
|Net Profit / Loss||-15.88||-1.18
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.
|750 # Feeder Steer OKC 150 days ago||1,200.00||160.00
|Cost of Gain 600 pounds||475.81||0.79
|Estimated Interest(Prime + 1%)||26.59||
|Current Texas Panhandle Cash||1,552.77||115.02
|Net Profit / Loss||-149.63||-11.08
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