July 21, 2014  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

 

THE MARKETS

  

 

Show lists are expected to be manageable this week and cattle owners will press asking prices back to $160. The slaughter rate remained static with the beef plants killing around 575,000 cattle the past two week -- the number shortened by a reduced cow kill. The drop credits on cattle moved to an all time high of something over $200 per head.

 

Sometimes things not said are as important as things said. This past week the transactions and positions established by packers and NOT reported were more important than the reported transactions. Instead of pushing the spot cash market higher at the end of last week, packers moved purchases into the out weeks. The were willing to purchase additional cattle at steady money of $157 live and $247 in the beef through the end of the month and into the first week in August. Trades also included cattle in Texas and Kansas at $7 over the August board.

 

Choice box prices turned lower at week's end. Balancing slaughter levels to current fed supplies is tricky as all segments of the beef pipeline begin to adjust to new pricing levels in the stores. Quality grades across the nation were running several percent higher than last year. Choice box prices were quoted at $248.50 with select at $242.50. The choice/select spread is $6.

 

The monthly cattle on feed report will show June placements slightly under prior year but July's decline will be more dramatic. The grass is green currently and the offerings of cattle are scarce and feedyard occupancies will decline as feedlots sell but do not replace. There will be some increased placement number this fall. Some of this summers decline in placements into feedyards has been middle weight cattle sent to grass.

 

The replacement market last week suffered the first decline in almost three months. Yearlings were $4-5 lower while calves fell $5-10 lower. Receipts were smaller at auctions across the country but video sales provided a broad outlet for many of the fall consignments. Heifer placements on feed have declined rapidly as more breeders are held for calf production. While the herd can not increase with the speed of the other meats, rebuilding is moving forward at full force motivated by the oldest and most effective stimulus -- price.

 

Corn price continue the downward spiral. Overnight trading Sunday night pushed corn another 7 cents lower. This pushes many corn producers into losses on this year's crop. Ideal growing conditions and good crop development has corn on track for a bountiful crop and the normal summer crop scare is looming more remote as each day passes. Three quarters of the crop is rated good to excellent. Corn is offered at $1 over the September contract basis Guymon Oklahoma. Corn is now pricing into rations at $8.75 on the southern plains.

 

 

INTRODUCING THE COMMERCIAL LONG HEDGER

 

The movement to the current elevated cattle prices is something most trade participants viewed as a isolated and temporary phenomena. Cattle owners and beef processors are a wary lot. They watched the price spike after the first of the year -- sometimes with doubt and disbelief. Most viewed the spike as temporary and have been awaiting more normalized seasonal price patterns to prick what some regard as a price bubble. After all, few believed beef could move through the pipeline at these elevated prices without a consumer backlash.

 

The speculative longs in the cattle market took a hit in 2013 when hopes that prices would reach $140 were denied and instead prices traded in the $120 level for much of that year. Technical traders have been short much of this year and sell signal after sell signal by the charts has resulted in major damage to traders who live by the language of "key reversals", "head and shoulder patterns", "moving averages" and other esoteric price interpretations.

 

The loss of many of the speculative long traders in the cattle futures market has resulted in an discounted price structure on all futures - spot and deferred. This has been a windfall for hedged feeders who have capitalized on unexpectedly large premium basises. The current futures price structure is set to attract a new clientele to the market -- the commercial long hedger.

 

Beef packers willing to step out into August and pay $7 premiums for a basis to the August board also might choose to protect price by buying the August board. The August contract settling last week at $151.60 might be an attractive risk management option. Protecting price is a key component of margin management. The days of leaving all pricing to the spot week's transactions, both on the buy and the sell side, is living in the past.

 

Cattle feeders also face a similar situation with feeder cattle. The spot August contract is selling at $211.57 as of last Friday. The deferred feeder contracts are flat for the balance of the year then fall back several dollars per hundred weight early next year. All these prices are discount to the current cash prices. It is doubtful the cattle feeder will see increasing numbers of feeder cattle next year. The feeding companies might find that option attractive and protect some portion of future inventory for price.

 

The days of a nice fully protection balanced position whether in the feedyard or packing plant are gone. They disappeared as packing plants and feedlots struggle to cope with downsizing facilities to match the downsized herd. Surviving in the current environment requires flexibility and adaptability and no small amount of nerve.

 

 

 

 

 

  

 

FEEDER MATRIX

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 Steer1,599.38213.25
Cost of Gain 600 pounds507.290.85
Estimated Interest(Prime + 1%)37.98 
Current Breakeven2,139.65158.49
Current Futures2,081.70154.20
Net Profit / Loss-57.95-4.29

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 ago1,282.50171.00
Cost of Gain 600 pounds536.480.89
Estimated Interest(Prime + 1%)27.08 
Resulting Breakeven1,846.06136.75
Current Texas Panhandle Cash2,092.50155.00
Net Profit / Loss246.4418.25

 

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