October 24, 2014  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

  

PLAINS MARKET TALK

 

The stage was set for the drama to play out according to script. Many of this week's show list were sold from $2-3 over the top. More cattle sold at $2 over the October board. The remaining pool of cattle offered for sale in the cash markets was very small. With a very small pool of cattle and packers needing more inventory. the market was set for a perfect squeeze. Starting bids of $162 barely were acknowledged then packer jumped to $165, $168 and finally $170 where sellers decided to cash in. This left many sellers priced at $172 or $2 over. 

 

This has been a year of two markets, running parallel to each other but frequently seemingly unrelated to each other, and more often functioning on separate tracks. The futures markets in cattle are wired differently and sometimes seem to be little correlated to logic and reason. Charts and technical triggers and outside political forces often drive the price action leaving momentary ebbs and flows that mostly are noise playing in the background while the cash markets go about their business of allocating a scarce resource by price and subject to the usual barriers of supply and demand.

 

Each nervous move up or down in the cattle futures eventually must pay homage to the fundamentals and align at some point to the cash and that point is often close to contract expiration. In the meantime, players in the cash markets that use futures for various types of price protection must function in a mysterious world where little makes sense.

 

Box prices moved lower making red ink deep in the packing houses of the country. The weekly slaughter number remained small and beef supplies limited. Seasonally the next 6 weeks before Thanksgiving are a good time for beef demand. Typically the middle cuts gain more favor as people stock up for the holidays. Choice box prices were quoted at $250 with select at $234 and the spread at $16.

 

The feeder index is most recently at $241 and the October feeder contract is closing the gap moving up well over $240. November is trading $7 back of the cash index. Volumes of replacement cattle are expected to wane in the coming month and it will be difficult to break the cash market for feeder cattle. The future of feeder prices will rest with corn prices and fed prices. A 750# steer is selling for $240 in the southern plains.

 

Grazing conditions favor promising gains for winter grain fields across a broad cross section of the southern plains. Timely rain and mild temperatures have contributed to good growth. Health issues always at the forefront in the fall, are causing stress among stocker operators who are finding normal death losses in the 10% range to be costly. For those stocker operators who are not interested in fighting animal health issues, some nice weaned 400# steers sold for just over $4/pound.

 

Corn futures prices lost a few cents of recent gains at a time when farmers are delivering a record crop. Corn reached $3.60 a bushel in the December contract before retreating. The crop is estimated to be one third harvested but good weather will speed up the finish. The corn basis in Guymon, Oklahoma is currently quoted at +$.50. Corn is now pricing into rations at $7.00 in the Oklahoma Panhandle.

 

CATTLE ON FEED ESTIMATES

 

This Friday will feature the USDA monthly cattle on feed report. The estimates below will place the on feed number at close to prior year. With the large placements expected for October, the Cattle on Feed at the end of October will likely exceed prior year for the first time in a long time.

 

U.S. CATTLE ON FEED ESTIMATES
                   IN YARDS WITH MORE THAN 1,000 CAPACITY
 
                                                  AVERAGE            RANGE
                                   ACTUAL       OF ESTIMATES     OF ESTIMATES
CATTLE ON FEED        October                           99.7       98.0-100.6
PLACED DURING       September                          101.4       93.1-107.0
MARKETED DURING     September                           99.2       94.0-100.0

 

 

WHEN LIQUIDITY FAILS

 

The CME globex trading platform displays the best 5 bids to buy and the best 5 offers to sell and traders can view the "Book" using customized software provided by most brokers. To market participants in the field and not on a computer viewing the Book, the fluctuations in the market for cattle futures prices might seem unfathomable.

 

A closer look at the Book, especially in the feeder cattle futures, provides a clear and understandable explanation. The Book of orders placed on the exchange are simply inadequate to support the entry of larger orders placed on either side of the market. It is not uncommon in the feeder cattle book to find orders for 1 or 2 contracts spaced .25 cents cwt. apart scattered up and down the price chain. The further out in the deferred months the more scattered are the bids and offers sometimes the bid/ask spread is over a dollar.

 

The implications of this poor liquidity is felt by every trader wanting to buy or sell 10 contracts. A 10 contract order entered as a market order [meaning fill at the best available posted price] might move the market $1 to $1.50 dollars. Predatory traders frequent enter low ball limit orders with the objective of filling some naive person who rushes to get filled with a market order.

 

Currently lenders are encouraging stocker operators to be sure they have protection for the high priced inventory they are acquiring. Protecting that inventory can either be done with options or hedged with futures. Option prices are so high as to be unaffordable [however, unaffordable is not a useful statement if the market tanks]. This leaves an outright hedge as a preferred course of action but good execution rests with liquidity.

 

Not helping the situation is the fact that managed futures brokers and hedge funds are pulling out of commodities at a time of economic and political uncertainty. The loss of these major players on both sides of the market is harmful to liquidity.

 

Poor liquidity favors no one. CME recognizes this fact and will be changing and reducing trading hours at the end of this month. It is the hope of the industry that this will improve liquidity and reduce volatility. In the meantime stay tuned for sharp moves up and down in the livestock futures.

 

 

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 Steer1,785.75238.10
Cost of Gain 600 pounds455.870.76
Estimated Interest(Prime + 1%)41.31 
Current Breakeven2,278.44168.77
Current Futures2,225.48164.85
Net Profit / Loss-52.96-3.92

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 ago1,462.50195.00
Cost of Gain 600 pounds517.060.86
Estimated Interest(Prime + 1%)30.06 
Resulting Breakeven2,009.62148.86
Current Texas Panhandle Cash2,214.00164.00
Net Profit / Loss204.3815.14

 

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