THE MARKETS

 

 

 

May 5, 2021

 

 

CATTLE MARKET REPORT AND ANALYSIS

  

 

PLAINS MARKET TALK

 

 

Cash Cattle

 

With processing margins near $700/head, packers eased up, refraining from beating up on the cattle feeder, and moved into the cash market with larger purchases than normal for early week. Prices ranged from $118-119 in all areas with northern sales losing their premiums. Most dressed prices were at $190-191. The online fed cattle auction featured a few sales at $118.50-$119 mainly in the south. Slaughter numbers moved back up to normal levels Tuesday but remain 3000 under last week. The processors appear to be allowing open market sellers to move some of the backlogged inventory and clean up supplies by cutting back some formula and grid customers.

 

There were some indications the supplies of fed cattle are more current. Packers jumping in early in the week is a good sign. Carcass weights dropping 8 pounds supports more current marketing numbers. The quality grade is in decline although this may be seasonal as calf feds in the north come to market. The only remaining component to a thriving cash market is the need for a much larger weekly slaughter.

 

Cattle Futures. Liquidation fears, caused by skyrocketing grain, combined with an inadequate processing capacity is threatening the entire live cattle sector. Futures prices seem to exhaust the selling binge.

 

The Comprehensive Fed Cattle Weekly Report offers the most current information on the current status of fed cattle being harvested. The report is published each Tuesday and includes the previous week's change in carcass weights and quality grading. The latest report shows carcass weights down 8# at 860#. Benchmarking weights against last year will be meaningless so we will discontinue the practice. Quality grade grading was down .5% at 82.50%. This is the first indication that we may have reached into some of the calf fed animals that are sold in the spring and carry lower grading percentages.

 

Forward Cattle Contracts:  Forward contracts will always bear some relationship to the corresponding futures month closest to the delivery month for the cattle. Basis levels will move up and down as processors want to add to forward contracts or not. Sometimes the forward contracts are associated with forward sales of beef and sometimes not. Packers may simply try to add an extra margin for taking the price risk off the hands of the producer. 

 

Weekly graphs on the Comprehensive Weekly Fed Cattle Report break down the categories of trade for the week according to 1) formula cattle; 2) negotiated live; 3) negotiated dressed; 4) and forward contracts. Some cattle included in the formula category are week to week negotiated grids and not committed cattle to one plant. Other cattle designated as formula are "over the tops" where packers purchase cattle at $1-2 over the highest price paid in any given region.

 

The Cutout. Box prices began this week higher once again as enough beef fails delivery to hungry buyers. Processors outsized margins some estimate at $700/head reflect the unfulfilled demand side of the beef pipeline from last week's meager weekly slaughter of 649,000 head. The cutout has now pushed to almost $300/cwt. -- one third higher than the price mid March. Middle meats have been propelling the move higher.

 

The box prices have ceased to be a driver of slaughter volumes. Processors will harvest all the fed cattle they can without regard to box prices. Those volumes will be restricted by labor woes and mechanical problems in aging plants. At the edges of processing, small inroads will occur with independents and small locker operations maximizing their processing facilities.

 


 
Choice CutoutChoice Price Change
304.78Up $3.56
 
Select CutoutSelect Price Change
286.18Up $2.27
 

 


 

Beef Feature Activity Index. Both retail and hotel/restaurant trade are planning Memorial Day beef features. Mother's Day also is an occasion that will receive a lot of attention this year at restaurants as most have re-opened and many people look for a dinner out.

 

 

Replacement markets

 

Replacement prices are running backwards as grain prices surge. The decline in feeder futures gave some producers an opportunity for an improved basis on hedged feeder cattle, but mostly they are finding a lack of buying interest from anyone. Many cattle hedged by stocker operations have gone unsold for May delivery and now as delivery approaches are offered for sale. The once large May premium has been lost at the CME feeder board. Feedlots continue to complain the replacement values are too high. With today's feeder cattle prices and today's grain prices, cattle placed on feed will forecast a $100/head loss.

 

Calf prices are showing strength across the nation. Good moisture in many areas has increased the interest in light cattle that are in diminishing supply. The cattle complex has been promising producers better prices in the future for a long time but the mirage disappears each new marketing period.

 

Grain will continue as a dominating factor in replacement cattle prices. Many stocker operators may choose to take a gamble on the feedlot instead of selling cattle at the distressed prices of today. Feedlot placements will be entering a period when year on year numbers are meaningless. With a slightly smaller calf crop and skyrocketing grain prices, fewer cattle will be placed for finishing.

 

The profile of the national herd is undergoing a change. The fourth quarter of 2020 and the first quarter of this year, both reported cow slaughter at the largest level in 10 years. Some of the volume was drought related and some market related because of high priced feed. The lack of balance of margins among the sectors must be corrected for any encouragement to produce beef or stop herd liquidation. 

 

Oklahoma City. Feeder prices were $2-3 lower once again as grain prices overwhelm the replacement market. Calf prices firmed as short supplies of light cattle are met with good demand and moisture in many areas.

 

Feeder Cattle Futures. Feeder futures are lower propelled by higher grain.   

 

Feeder Cattle Cash Index. The index is tracking the moves in cash prices.   

 

Forward cattle contracting. Stocker operators are hoping basis levels for spring feeder cattle will narrow. Many operators are finding hedged inventory on pasture facing losses on futures positions. Feedlots, with much uncertainty about feed costs, are cautious establishing basis bids. Basis levels for all replacement feeder cattle have been unusually wide.

 

National Weekly Feeder Summary released on Friday of each week tracks the national prices by region for last week.   

 

Grain Futures. Corn prices have not stopped heading higher. The change is the proportional direction of the contracts of grain. The most recent moves are favoring the new crop contracts at the expense of the old crop prices. Corn planting jumped up to well over half this past week. Completion of planting will be over soon and acreage reports will follow.

 

Many questions surround the sustainability of $7 corn. Demand destruction is always possible when corn reaches these lofty levels. The resulting high prices of meat may cause some consumers to balk at the price and eat less meat. Export demand for corn and soybeans may wane. Much of the Chinese purchases has not been shipped and could be resold in our markets.  Ethanol policies and mandates may change. Finishing facilities for all meats may switch from corn to wheat.

 

 

 

 

 

NO TIME FOR A BREATHER

 

The assault on beef producers has been unrelenting. Some of our readers have called for government investigations into the obscene profits of the processors. Unfortunately there is nothing illegal occurring - no collusion, no price fixing, no restraint of trade. Processors are simply taking advantage of under capacity in the beef processing plants of the nation by letting producers drop asking prices to a point where they can buy a slaughter slot. This is destructive of the selling price for fed cattle at a time when demand for beef is hitting an all time high.

 

The coincidence, of simultaneously the inputs for producing fed cattle are skyrocketing, is another challenge that must be addressed as the live cattle owners attempt to navigate through the treacherous waters of beef production. Corn prices are headed for all time highs propelled by strong export demand and drought threats in the corn belt. The short stocks of corn will present razor thin margins on the grain stocks balance sheet.

 

In a country where everyone wants to play the role of a victim, the preferred approach is proactive. The choices made by beef producers, both individually and as a group, will be determinative of the viability of the industry. The start is adding processing capacities. Competition is at the core of healthy markets and there can be no competition when the industry lacks sufficient processing capacity.

 

Producers can't change the weather or call in more rain. They can choose other feed ingredients. Wheat is 10% or more cheaper than corn and switching just makes good sense. Half of our corn crop feeds the heavily subsidized ethanol market and that needs to stop. Subsidizing the entire fat market in order to turn all fat products, both animal and vegatable, into biodiesel is crazy and denies beef producers access to a valuable feed ingredient.

 

The inflationary pressures of the government hand outs and low interest rate policies are beginning. Government officials promise us inflation will be held to 2% but evidence suggests otherwise. The inflationary prices will eventually reach the live sector of beef. Live sector beef production, with record corn prices, can not be sustained with producers receiving $120 or $130 for fed cattle when packers could pay up to $165 before losing money. The sharing of margins will correct at some point. 

 

The last ditch option is culling the cow herd. If the industry can't encourage more beef plants, the herd must be smaller to restore balance to the marketplace. Some natural culling will occur during periods of drought. Culling because of insufficient prices, is a "give up" mode and fails to respond to the needs of the marketplace that is calling for more beef. There is some evidence developing indicating red meat strengthens the immune system and a balanced diet including red meat will help protect everyone.

 


CATTLE REPORT LIBRARY

 

Below are links to articles published in the Cattle Report pertaining to industry change. Two important changes are on the table for progress -- supply chain management and animal ID. Both applications will transform and disrupt the industry.

 

THE BEEF BLOCKCHAIN

 

THE BEEF BLOCKCHAIN SLIDE SHOW

 

The Case for National ID for Cattle

 

Reforming the Futures Contract and Cash Trading of Cattle

 

 

NOTE TO READERS

 

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

 

 

 

 

FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES

 

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 futures contract.

INPUTSTOTAL$$CWT
750 # Feeder Steer986.10126.48
Cost of Gain 600 pounds755.301.26
Estimated Interest(Prime + 1%)27.73 
Current Breakeven1,769.13130.50
Current Futures1,661.85123.10
Net Profit / Loss-107.28-7.40

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 ago1,035.00138.00
Cost of Gain 600 pounds638.491.06
Estimated Interest(Prime + 1%)23.65 
Resulting Breakeven1,697.14125.71
Current Texas Panhandle Cash1,598.13118.38
Net Profit / Loss-99.01-7.33

 

 

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