July 29, 2016 



BOC Loan






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. 


Carcass weights are released each Thursday and will be a closely watched barometer indicating the position of cattle feeders in the nation's feedlots. The last report 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.


Forward Cattle 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 CutoutChoice Price Change
199.93Down $0.16
Select CutoutSelect Price Change
190.82Up $1.25







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 replacement cattle.


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.       


The National 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..






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 Eurodollar.


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 selling sources.


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.








Sections of the newsletter are redesigned with hyperlinks to the appropriate source pages. The hyperlinks are in light blue within the report.










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. 




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.

750 # Feeder Steer1,052.48140.33
Cost of Gain 600 pounds449.450.75
Estimated Interest(Prime + 1%)28.52 
Current Breakeven1,524.91112.96
Current Futures1,509.03111.78
Net Profit / Loss-15.88-1.18


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 ago1,200.00160.00
Cost of Gain 600 pounds475.810.79
Estimated Interest(Prime + 1%)26.59 
Resulting Breakeven1,702.40126.10
Current Texas Panhandle Cash1,552.77115.02
Net Profit / Loss-149.63-11.08

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