September 24, 2016 



BOC Loan








                        U.S. CATTLE ON FEED ESTIMATES
                   IN YARDS WITH MORE THAN 1,000 CAPACITY
                                                  AVERAGE            RANGE
                                   ACTUAL       OF ESTIMATES     OF ESTIMATES
CATTLE ON FEED      September           101            101.2      100.3-101.9
PLACED DURING          August           115            113.1      108.6-118.0
MARKETED DURING        August           118            117.5      112.3-118.1

The monthly COF report contained few surprises.  Marketings were slight above pre-release guesses and placements were also slightly higher than the average of guesses. Last year was the lightest on record for placements and the placements reported by USDA fell far below a five year average. The marketing number buttresses the notion that front end supplies are current.


Cash Cattle. Following a wild day in futures trading, prices recovered to close on the positive side in the spot contract. Early sellers in the north suffered at the mercy of the packers and crashing futures cratering to lower bids with sales at $105-7 while dressed prices were from $166-168 -- three lower than last week. In the south where packers lowered bids to $107 and no takers, bids were back to $108 after the rally in futures but still no takers.


Cattle Futures. Futures prices traded a few points from limit down before staging a late session rally to close higher in the October contract. Today's cattle on feed report will offer some insights into placements and marketing numbers -- both are expected to be much larger but this year include two more days than last year and last year's placements in August were all all time low number. 


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 September 10th, had steer carcass weights up 5# at 903# remaining well below last year. This is the first reported week with steer carcasses over 900#. 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. Adding into the total tonnage picture is the percentage of heifers in the slaughter mix. Heifer slaughter has increased significantly in the past few weeks.


Forward Cattle Contracts: The deferred futures months may not yet be large premiums but they are narrowing the recent large gap between cash and futures. Premium based futures are normal for the winter months because they represent a weather risk to producers. There will be little interest on the part of sellers to part with forward cattle sales at discounts 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%. Some of the formula arrangements are week to week negotiated prices and not committed cattle to one plant.


The Cutout. Box prices are moving higher with rumors that this week's slaughter number will decline as margins are squeezed. Last week's slaughter level at 604,000 will keep plenty of beef available for the market to absorb. Seasonal improvement in beef demand is normal for this time of the year.


Brazilian beef plants were approved for shipment of fresh beef to the United States announced by USDA on August 1. Those shipments will begin this weekend. There is not expected to be a sea change in international movements of beef. We already receive beef from some South American countries and much of Brazil's beef moves to the EU and Asia.


Chinese Premier Li said China will soon resume U.S. beef imports. China is a large market for U.S. beef and while some beef has been moving through Hong Kong, this news may facilitate increasing supplies by year end. Questions remain about the rules and regulation regarding imports and how hormones, ractopamine and individual animal identification will play into this announcement. This will reverse a ban set in place following a mad cow discovered in this country.


The lengthy and continuing large cow slaughter will factor into the overall cow numbers in the country and certainly will slow any additional expansion if the fed prices haven't already done that. Heifer placements are increasing in the nation's feedyards. Few operators are seeing a two way option for heifers -- to sell as feeders or breeders.  




Choice CutoutChoice Price Change
186.81Down $0.56
Select CutoutSelect Price Change
178.81Down $0.81









Replacement markets


Observers of the replacement market can witness two different markets. In the north demand for feeder cattle from farmer feeders who are willing to invest this year's corn crop in cattle instead of booking a cash sale to the grain companies, has created a premium priced market for sellers in those areas. Yearling steers weighing 775# brought $155 in St. Joe at auction. These cattle will have freight and buying commissions to add to the price before finding a home in the north. At the same time in the south, yearlings of similar weight were bringing $135 in Texas. Qualities may not completely match but the price variances are wide.


September placements to date have not been large. Stocker operators are not anxious to cash in money losing grazing cattle and forage is good and cattle are gaining and expected to continue until frost. There is little enthusiasm for bidding up prices for feeder cattle when all evidence points to a glut coming in October. Yearling cattle are in good supply and feedlots are being selective in bids with 800# steers selling in the low $130s.


Stocker operators are more interested in weaned calves but dealers are more interested in selling unweaned calves. There is an unusually large spread between weaned and unweaned calves and many western ranchers are finding extra value by weaning the calves on site. Spreads in weaned vs. unweaned cattle are large. The video auction reported some nice quality 450# weaned steers at $175. This would compare to unweaned high risk sale barn cattle that could be purchased for $145 delivered to the Texas Panhandle.


Oklahoma City. The OKC auction was $2-5 higher of most replacement classes when compared to last week. Heavier cattle offered the best interest as some see a quick finish as a short term play if the fed prices continue to recover.


Feeder futures showed the volatility that is becoming common in the contract. The October contract showed a $5 trading range with 300 point losses much of the day recovering to only show a modest loss for the day. Lower cash prices for fed cattle has discouraged interest in feeder cattle.  


Feeder Cattle Cash Index. The index is in the final stages of convergence with cash prices as the September contract winds down. 


Forward cattle contracting. The basis for forward contracted feeder cattle is being lowered by many feeding firms. Basis trades off the forward contracts are quoted  -$2 for a 775# steer delivered to the Texas Panhandle. Many feedyards are filling up and large amounts of unsold cattle remain in grazing locations that have enjoyed good rains and are finishing the season with green grass growing.         


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


Corn futures. Corn prices are moving lower as harvest progresses in most regions. Grain elevators are pushing grain out the door preparing for this year's corn crop. Corn basis quotes over the December are close to par in Guymon Oklahoma. Corn is now pricing into rations at $6.00 cwt. in the Oklahoma Panhandle compared to wheat at $5.80 cwt..




Almost all participants in the cattle markets agree on the need to reform the live cattle futures contract. In an attempt to sort through the issues involved in changing the contract, we have Frequently Asked Questions posted on the link below that are an attempt to capture many of the diverse opinions on this reform. The Cattle Report welcomes comments from readers.






It is easy for many to look at this summer's price graph for fed cattle prices and draw the conclusion that this past week represents a market bottom. The cash prices bounced off a 5 year low and rallied $5 this past week to close mostly at $110. Of course, we also remember the many false alarms of a market bottom that have been called by forecasters and market participants for the past two and a half months. Those predictions proved to be false bottoms. Anyone stating with certainty that this one is for real might be overreaching. There is no certainty in these markets and only those who recognize this simple fact can deal with the volatility we face daily in the price discovery process. 


The negative basis of futures to cash prices has narrowed. The many weeks of a $10 negative basis has been replaced with a current  -$3 basis. The deferred contracts through year end and the early months of 2017 are flat with spot month October. As we found this week, the rush to sell was abated at the -$3 level and if that level is sustained for the next few weeks, the market may have more gains in front of us.


Carcass weights are reflecting a fairly current pool of fed offerings. Steer weights for the last report were 16# under prior year. The pulling forward of the past couple of months has diminished the carry over from month to month and if you eliminate the panic selling caused by deep discounts in the futures then a more normalized marketing pattern may leave the cattle feeders with a stronger bargaining position moving forward.


Futures traders are not convinced the market is headed up and the spot October contract remains $3 under the cash prices. The normal premiums seasonally expected in the deferred months are absent. Heavy meat supplies will keep the consumer with lots of options and lots of price competition among the meats. Placements of cattle on feed continue to top prior years and the feedlot occupancy levels remain up from the past couple of years.


Into the equation of prices will always be processing and retail margins. Packers lost ground this week as fed prices jumped and box prices fell. As processing margins are squeezed, you can expect the packers to trim the kill. Paring back the slaughter number will build up supplies in the feedlots. Smaller slaughter numbers will allow packers to negotiate higher box prices from retailers but higher prices on the beef cuts will cut into retail margins causing less beef features.


The marketplace is attempting to discover a price level appropriate for the current expanded beef herd. The challenge is to find a price level that will allow all segments of the industry to margin a profit. This does not and will not occur at the same time but over a period of ups and downs, the marketplace must find a price level across sector segments that satisfies an economic model of profitability. 





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 Steer1,025.48136.73
Cost of Gain 600 pounds441.340.74
Estimated Interest(Prime + 1%)27.83 
Current Breakeven1,489.20110.31
Current Futures1,439.51106.63
Net Profit / Loss-49.70-3.68


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 pounds451.110.75
Estimated Interest(Prime + 1%)26.36 
Resulting Breakeven1,677.47124.26
Current Texas Panhandle Cash1,483.79109.91
Net Profit / Loss-193.69-14.35

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