December 21, 2014
CATTLE MARKET REPORT AND ANALYSIS
PLAINS MARKET TALK
There was a lot of daylight between the highest trade
price on cattle futures and the lowest trade price. In the short period
since the beginning of the month, volatility has been the defining
characteristic of futures trading in cattle. It has been a month of
extremes. see this week's editorial on the topic
Packers took advantage of the chaos to pick off as many
cattle as they could before live cattle futures locked limit up. Weekly sales
have ranged from a high of $160 on Tuesday down to mostly $157-158 mid week
then recovery to $160 in late week trading.
One overlooked change during the turmoil in the livestock
markets last week was the change in the basis. The $2 over the top bids
disappeared. The $3 over December futures also were gone. At week's end
cattle were trading par to the expiring December futures.
Box prices featured the customary Friday cleanup as choice
cuts fell $3. Retailers are sensing an opportunity to replenish depleted
inventories with much cheaper cuts. Traders are looking for a bottoming of
the box prices in the current trading range. Choice box prices were quoted at $239
with select at $230 and the
spread at $9.
A major realignment is occurring in feeder cattle prices.
Futures prices for feeder cattle recovered from the free fall but settled a
long ways from the trade level of two weeks ago. The cash markets in stocker
and feeder cattle were $10-20 lower with some undesirable classes struggling
to find a market at any price.
Overpricing in the feeder arena has been caused by competition among
cattle feeders with much feeding capacity
and too few cattle. This condition is not going to change with a calendar
change to a new year. Competition will remain intense as feedlots fight over
still tight supplies of feeder cattle. The feeder index remains well above futures
but is falling. A 750# steer is selling for $220
in the southern plains.
Corn prices were flat at week's end. Farmer selling has
remained light as most farmers will consider tax considerations by marketing
grain after year end.
basis in Guymon, Oklahoma is currently quoted at +$.40 over the March
contract. Corn is
now pricing into rations at $8.50 cwt. in the Oklahoma Panhandle.
REBALANCING THE INDEX FUNDS
Index funds provide large corporations with a vehicle for
protecting inflation risks. The index funds offer a one stop shopping cart
through the purchase of the index fund -- allowing companies and individuals
a hedge against rising commodity prices. The index fund then goes into the
futures market and purchases a basket of well defined commodities assigning
a certain allocation to each commodity.
Ag commodities are part of the mix and cattle and corn are
prominent in the mix. At the beginning of 2014 a index fund might allocation
20% of the fund to cattle and another 20% to corn. The funds examine the
allocations at year end to assure they are maintaining the proper
percentages of each commodity in the fund.
In the past year, cattle have risen sharply and corn has
declined sharply. This creates a need for the funds to rebalance and sell
cattle positions and purchase corn positions in order to maintain the proper
percentages. This anomaly operating outside any fundamental considerations
in the marketplace has contributed to the recent decline in cattle and rally
Touching the extremes in the cattle markets
A banker friend dropped by this week to report a recent
visit the first of December to a local brokerage firm. the banker suggested
to the broker that he was interested in selling short some cattle futures.
The broker challenged him for justification of the proposed trade. The
banker said he had no data -- only a hunch that cattle had gotten too high.
The banker was not alone in his hunch and unfortunately
was talked out of a short position by the broker. Insiders and outsiders
alike have been feeling a market decline was overdue. In a short two week
period the evidence was on the table. After touching all time market highs
of $173, fed cattle prices dropped to $157 this past week rebounding to $160
on Friday. February live cattle traded at $172 two week ago and traded as
low as $155 this past week. January feeder cattle, trading at $235 the first
of the month, fell to $212 this past week. And finally, during this time
frame, box prices moved from $255 to the current quote of $238 on the choice
Some described the markets as panic selling. There
certainly was an emotional edge and reason took a back seat to many trade
decisions. There also was a practical side to the price movements. Bankers
pressured many operators who had lapsed in their risk management programs,
having been stung time and time again by new market highs, to seek
protection. Seeking protection, when the markets are unavailable from limit
down moves, is not an option. The cumulative effect of a market not
responding to trader's needs, is over-reaction. Finally, when the limits
were expanded and the selling exhausted, new buying entered the market and
the markets shot higher.
A collapse in any market spells opportunity for some in
the marketplace. Processors and retailers who have been living hand to mouth
with limited cattle supplies saw a price level $30 cwt. lower than recent
$173 prices. Even some food service and foreign importers of U.S. beef
viewed the drop as a price opportunity.
The recent price action was a reminder that prices can go
down as quickly as they went up. Red ink can be right around the corner. It
also was a text book example of markets over-reacting. When all the dust
settles from the recent turmoil and shake out, markets will return to
fundamentals. Beef will remain in short supply for most of 2015 but
competing meats will be expanding supply and there will be more chicken and
pork. But lower gas prices and a improving economy will keep demand for beef
on the consumer's radar.
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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