July 29, 2014
CATTLE MARKET REPORT AND ANALYSIS
Live cattle futures opened above $160 Monday but could not
hold and closed mostly steady. Show list are smaller with larger lists
everywhere except Nebraska where show list plummeted. It is likely because
packers are buying out two and three weeks at a time. Asking prices on many
cattle are moving to $170 or $5 higher than the bulk of last week's pricing.
The cash trade this past week represented price as a rationing
mechanism for a scarce resource. The cattle feeder is in a similar position
to a publicly held corporation enjoying short term beneficial profits at the
expense of long term stability and sustainability. There will come a
time soon when retailer marketers of beef will be forced to raise prices
significantly to the consumer both in stores and restaurants and there will
be some resistance. Offsetting this inevitably fact, is the future supplies
of beef will only get smaller at least for another year.
Box prices were $2 higher in early week trading.
The retailers have been short bought. They joined packers in expressing the
view than larger supplies were going to be on offer later this summer -- a
view that is now discredited by many. Both packers and retailers are scrambling to catch up on inventory. Quality grades across the nation were running several percent higher than
last year. Choice box prices
were quoted at $258 with select
at $255. The choice/select spread is $3.
Feeder futures retraced lost ground and are setting all
time highs once again. Cash prices for replacement cattle are in lockstep
and pushing higher and higher. 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.
A 750 # steer was selling for $218 in the southern plains.
Corn price moved higher as shorts took profits. Corn prices now
have fallen almost $1.50 a bushel in a month. Corn prices have suffered on
the board but the basis has been unusually strong and feedyards in the
southern plains has seen the premium basis negate much of the fall in corn
prices. This is expected to change in the fall and fall basis for corn will
bring to the forefront the full discounted price to cattle on feed in the
The current price 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 $1.20 over the
September contract basis Guymon Oklahoma. Corn is now pricing into rations
at $8.75 on the southern plains.
HOW HIGH IS HIGH
It is always dangerous and scary when the high pressure
salesman starts to believe his own sales pitch. The cash prices for cattle
have surprised and amazed many market participants. Record after record has
been broken. A step back from the day to day or week to week might be useful
in order to understand the significance and impact of this monumental price
The July cattle inventory report confirmed cattle numbers
at a 60 year low. While this has been occurring, the world is coming to rely
more and more on meats in the diet and third world countries, frequently
resigned to grain based diets, are turning to meats including beef.
Domestically our beef eaters are eating less beef not because they are
turning away from beef but simply because there is less beef.
A drop in the grain prices has historically and
traditionally signaled an increase in placements of cattle on feed. Corn has
fallen $1.50 a bushel to well under half the price of a short time back.
This has not resulted in an increased number of cattle placed on feed
because there is an insufficient supply of cattle to bring on feed. In
the same way beef consumption has declined because there is less beef,
placements have declined because we have been pulling forward on cattle and
the remainder of cattle outside of feedyards is dwindling.
Against this backdrop are skeptical cattle feeders who
have questioned the sustainability of the price rise all the way up. Each
new peak was thought to be IT
only to have prices consolidate and head back up again - each time pushing
into new untested price territory. Everyone knows that one of these days
will be an IT day and the
market will hit the top and the new direction will be down. No one knows
when that will be. The chartist and the technical traders are only a failed
sideshow at this point.
An increasing number of players are coming to believe
these prices are here to stay and may get higher. The cattle feeders and
stocker operators that have played safe and hedged their inventory are sick
of margin calls created by higher futures prices. Some of those operations
are choosing to abandon the hedge programs and turn bullish. Therein lies
the risk to the industry. If you know a $160 feeder steer can lose money,
think about how much money a $260 feeder steer could lose.
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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