April 24, 2014  

                    

CATTLE MARKET REPORT AND ANALYSIS

 

 

THE MARKETS

  

 

Short positions in the expiring April contract might watch out. Commercial longs or packers might not be ready to close long positions opting for letting $143-144 cattle come to them. The unusually wide basis of the past month will at some point narrow and the current market might be the catalyst for it to happen.

 

Packers are seeing opportunity on the doorstep with rising beef prices and pressures on cash cattle. The object of this week's trading will be to raise beef prices without raising live cattle prices. Early bids of $142-144 in the south and $232 in the beef in the north failed to attract any sellers. Futures prices rose again in response to higher box prices and firm asking prices from cattle owners. Most cattle remain priced $5 over April futures. Box prices have added $5 this week.

 

Managing the slaughter number will be key to the market in the next few weeks. This weeks slaughter is currently running under last week's paltry 563,000 cattle. This will change by week's end and is expected to be over 580,000 cattle. Packers are ready and willing to ramp up the slaughter but want to be careful not to pull forward too many supplies from the feedlots putting the feeder back in control of price.

 

Box prices continued higher at mid week adding $6 so far this week. Packer margins are pushing into the black and they will hope to hold all of the gains for their own pocketbook. Retailers will need to gear up for Memorial day and spring features for outdoor grilling. Choice box prices were quoted $1 higher at $232 for choice and select $1 higher at $221. The choice/select spread is $11.

 

Replacement supplies are tight and this is squeezing margins at the feedlot where rising corn prices are combined with rising feeder cattle prices. Feeder contracts are the most lightly traded contract in the livestock complex. Lightly traded translates into volatility. When speculators want a position in the market they will necessarily force the market higher and sometimes in the extreme. There are a few less commercial hedgers in the feeder cattle due to futures losses this year on hedged feeder cattle positions. People always back away from hedges after taking a loss. Prices were generally firm to $2 higher on replacement offerings. A 750# feeder steer was costing $180 in the plains.

 

A quick look at the year ago price comparisons for feeder cattle tells the story of replacement costs. A year ago a 750# feeder steer was selling close to $130 and today close to $180. The $/head today is $1350. Operators at every level are tallying the $/head and especially the bankers. The value of a 750# steer has increased $350/head over prior year. Time is not long past when $350 bought a pretty decent feeder steer.

 

Corn prices are trading on the top side of $5/bushel on all summer contracts. World crop production for corn is expanding and conditions are good for planting in the corn belt this year. The basis is 65 cents over March corn for Guymon Oklahoma. Corn is pricing into most rations at $10.00 cwt. in the southern plains.

 

 

 

 

A MUTUAL INTERDEPENDENCE

 

Suspicion and distrust are not unusual words used by one party to characterize the opposing party in cattle price transactions that are at the heart of every week's business. Whether your interest are at the feedlot level or the beef processing level, weekly changes in fed cattle prices favor or disfavor one of the parties. This weekly conflict belies a greater need for each -- that both the cattle feeder and the beef processor prosper and continue in business.

 

At no time has this relationship been tested more than the recent couple of years of record breaking grain prices and downsizing of the national cattle herd. Downsizing has meant coping with oversized facilities built for another time when cattle were plentiful. Over capacity means forced reduction of both processing plants and feeding capacities. Downsizing hurts and losing money over prolonged periods is painful whether you are in the beef plant or the feedlot.

 

The tug of war between fed cattle offerings and demand for beef is a complex matrix and just when someone believes they have figured it out, a surprise in the marketplace surfaces that changes it all. Demand for beef has been slow to develop this spring and some feel it is on the way. Processors have pared back the slaughter to record low levels because of negative margins. Supplies of fed cattle are increasing and the balance between increasing supplies and increasing demand will feature a new price point. No one knows how that will play out. 

 

Packers successfully lowered input cost this past week while at the same time raising box prices. This happened by reducing the slaughter. The match up is fairly simple. Cattle feeders can refuse lower bids and force higher prices at will for any given week. The problem is the next week and the next. If they refuse lower bids and only sell a few cattle at higher prices then they carryover more cattle and so on until numbers build and they are compelled to sell rather than suffer overweight penalties.

 

This tension between supplies and demand is constantly at work. The ideal situation of both processor and feeder profiting is rarely at work or if it is at work -- not for long. Typical cycles are for one of the parties to be profiting while the other is suffering. The last either would want is for the other party to lose money for such a prolonged period that they go out of business.

 

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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 Steer1,339.28178.57
Cost of Gain 500 pounds462.610.93
Estimated Interest(Prime + 1%)32.18 
Current Breakeven1,829.50146.36
Current Futures1,736.00138.88
Net Profit / Loss-93.50-7.48

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 ago1,172.40156.32
Cost of Gain 500 pounds459.330.92
Estimated Interest(Prime + 1%)24.49 
Resulting Breakeven1,656.22132.50
Current Texas Panhandle Cash1,825.00146.00
Net Profit / Loss168.7813.50

 

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