November 26, 2015  









It is unusual on Thanksgiving week for trade to be undefined by midweek. Packers are generally anxious to tie up inventory before most people take off for the week, but these are unusual times. Very small volumes of cattle continued to trade in the north at steady money but the bulk of asking prices were higher. Live prices were $125 and dressed at $195. Futures prices are anticipating higher prices, but that also doesn't make it happen. Friday will feature a shortened futures close at noon.


The largest drag on beef sales has been the grind. The cold storage report released this week posted one of the largest inventories of ground beef in storage for recent years. Most ground beef blends are selling 50-75% under last year and continue to represent a large portion of beef sales. Margins should be good for retailers and the timing good for a turn to beef. Both choice and select cuts gained a dollar at mid week. The choice cut was quoted at $204 and select lower at $194 leaving the spread at $10. 


The feeder index has been falling in dollar multiples as cash prices tumble for replacement cattle across the country. Most auction barns will be closed this week. Oklahoma City was the exception and trading was active with demand good and prices up to $5 higher. Trading in yearling cattle is drawing to a halt for the year as most replacement cattle hold off marketing plans until after year end. Feedlots sitting with empty pens need cattle but with lousy margins and oversized losses on current close outs, there is little optimism. 


Corn futures flattened out at mid week. The corn basis is remaining flat in most regions. Corn remains in a trading range between $3.50 and $4.00 a bushel. The corn basis in Guymon, Oklahoma is currently quoted at +$.40 over the December contract. Corn is now pricing into rations at $7.15 cwt. in the Oklahoma Panhandle.






While all classes of cattle are selling at large discounts to last year, sometimes exceeding $500-600/head, there is no assurance the new purchases will be profitable and most are certainly not hedgeable. This points much of the frustrations of those in the business of owning cattle towards Chicago and the futures market at the CME. Editorial comments across most livestock publications directed fault to the CME and the relatively new electronic trade matching platforms. The problem as identified by many critics is High Frequency Trading and its role in volatility. The charge asserted is that computerized trading has created an unreliable cattle futures contract plagued with high volatility and movements lacking any justification in market fundamentals.


High frequency trading is greatly misunderstood. Transactions falling under this fuzzy banner include both legal and questionable practices. It is no surprise in a world of electronic trading that traders wanting to execute orders based on market breaking information would want to have those instructions sent to the CME trade platform, called Globex, as quickly as possible. The order from a rancher in a rural area of the Texas Panhandle will find his order will reach the exchange slower than a Chicago trader who is on a high speed connection close to the exchange. The differences are measured in milliseconds but the difference can be huge to traders who can act quicker and execute on breaking news events or any other time sensitive releases. Traders and industry participants share in the desire to be able to respond quickly to news but there can never be any assurances that all orders will be received with the same speed because that is impossible.


Paying for faster hardware and software to speed order execution is not illegal. Broker firms trading on the CME are always tweaking their software and hardware in an effort to speed order entry and execution. Some technical traders want to respond to chart trigger points with lightning speed and use algorithms or computer instructions that will execute orders without human intervention. There is nothing nefarious about this action nor evil about people who want to pay for faster speeds and capitalize on the benefits through trading. This is after all the foundation one of the largest privately owned company in the United States -- Cargill. Cargill build a business on gathering information faster and making markets in rural America with ranchers and farmers lacking the ability to receive or act on market moving news.


The story doesn't stop here and the CME is not off the hook for trade practices that are unfair and should be illegal. The CME is offering large trading firms an opportunity to Co-locate [COLO] next to the Globex trade matching platform for fees of hundreds of thousands of dollars a year. The scrutiny on this practice should center on advantages given to those firms that would or might result in unfair trade matching.


1. Are any traders allowed to see and act on new orders before they reach the Globex trade platform? Many orders come in through broker firms who have their own servers.


2. Can positions be arbitraged without risk to the traders, similar to orders in the black holes of the stock market described in Michael Lewis's book FLASH BOYS? 


3. There are traders operating on the exchange that clear inventory of positions to -0- at the end of the day. Are they margining their accounts like other traders?


4. Is it possible to list an order in the book of a trading month on the exchange that can't be hit?


5. Can certain firms see a deeper look into the order book than most traders? [most can only see the best 5 bids to buy and orders to sell]


Frontrunning is illegal and no matter how it is described by the exchange, if a trading firm can see and act on another person's orders before it reaches the Globex book, without risk to the trading firm, that should be stopped. High frequency trading is not the culprit in high volatility except to the extent faster orders on breaking news can crash or rally markets, the bad guy is the contract itself. The current contract is designed for a different day and time and the high volatility is because it is tracking and matching up against a very small pool of cash trades that no longer represents a market. A new contract will help correct this problem. In the meantime, the CME would go a long way to restore confidence in the fairness of trading by answering the questions regarding trade practices.





Readers have been sending notes regarding breakeven projections. One commenter ask how we could use 80 cents for a cost of gain when everyone knows that is too low. Another ask why we are using such a high cost of gain number. The two emails illustrate the difficulty of providing one benchmark for all regions of the country. Currently a typical bases in the corn belt might be $1 under the futures and alternatively a corn basis in Hereford, Texas might be $1 over the futures. The northern feeders have much cheaper grain and more expensive feeder cattle. A more meaningful report would include one breakeven and close out for each major region. It also is difficult maintaining the tables when both fed and replacement prices are changing in $5-10 cwt. price blocks.




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 Steer1,307.93174.39
Cost of Gain 600 pounds475.930.79
Estimated Interest(Prime + 1%)31.66 
Current Breakeven1,810.82134.14
Current Futures1,684.13124.75
Net Profit / Loss-126.70-9.39


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 ago1,740.00232.00
Cost of Gain 600 pounds518.250.86
Estimated Interest(Prime + 1%)34.92 
Resulting Breakeven2,293.17169.86
Current Texas Panhandle Cash1,713.69126.94
Net Profit / Loss-579.48-42.92

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