September 9, 2024 THE MARKETS Cattle owners will start the week with an attempt to reverse the downward spiral of fed prices and give support to prices that last week fell below last year. Monday witnessed the release of smaller show lists from all regions. Futures prices that were serving as a catalyst for packer […]
September 9, 2024
THE MARKETS
Cattle owners will start the week with an attempt to reverse the downward spiral of fed prices and give support to prices that last week fell below last year. Monday witnessed the release of smaller show lists from all regions. Futures prices that were serving as a catalyst for packer leverage reversed course and staged a early week rally that might change the tone of the cash markets.
Lower futures and weak box prices pushed sellers into $2-3 lower prices in all regions last week. Live sales were mostly at $181 in the north and the south — narrowing the spread to par. Northern dressed sales were reported at $286-$288 with more at the high end of the range –$2-4 lower.
The past month has improved margins at the beef plant with cheaper cattle and stable box prices. This week’s slaughter at 544,000 was down 44,000 because of the holiday but also down 16,000 head from last year. The fed cattle portion of the weekly slaughter continues to make a larger percentage of the total slaughter than prior years with cow slaughter of both dairy and beef cows in decline. Expectations for a larger cow slaughter have failed to develop. Beef production, however, continues strong in the face of smaller numbers because of heavier carcass weights.
Cattle Futures. Sharply higher prices started the week. For those traders whose timing is keen, this has been a traders market with large moves up and down.
Benchmarking. On Tuesday of each week, USDA releases a weighted average price report for all cattle sold the previous week. The report summarizes the distributed price levels for each category of sale such as Negotiated/Formula/Forward Contracts. Beef producers are able to measure the marketing price for their cattle compared to the national averages.
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 at 905# up 2# from prior week and 32# heavier than last year. Carcass weights will be fundamental in determining total beef production. The combined steer and heifer weights can easily be influenced when the proportion of steers to heifers in the weekly slaughter changes. Quality grade was up .2% at 83.30%. This was 4% over last year.
The Weekly Steer and Heifer Grading Report is indicative of regional supplies of choice and prime cattle and often is determinative of regional differences is live price. The report is also reflective of the current status of fed cattle offerings in each area.
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. The driver in forward purchases of cattle will always be forward sales of beef. Packers will always be willing to take a price risk off the producer’s plate in return for an extra margin.
Formula and Negotiated Grids. The Price and Distribution Report delineates the various selling methods and net results. The Cattle Contracts Report details the percent of contracts by volume of cattle and by number of contracts for selling cattle. Formula selling that was once the largest marketing method and still is, but is losing ground to negotiated grids where the premiums and discounts are set but the base price is negotiated.
The story of the marketing for beef cuts has been the grind. The 90% grind has dominated the value of the cutout propelled by the reduction in the cow slaughter. More of the end meats have gone into the grind as consumers downgrade their beef cut buys.
The Cutout. Box prices were flat to higher. Seasonally box prices reach a low in September then rally into year end. Labor day clearance appears to be good.
A longer term trend is developing the relationship between choice and select cuts. Cheaper feed and high replacement costs has encouraged cattle owners to feed cattle longer. The result has been a consistent improvement in quality grade in the nation’s beef plants. The percent of cattle grading choice or better has been rising 2-4% over last year narrowing the choice/select spread in the carcass cutout. The spread at $10 cwt. is $15 cwt. under last year.
Replacement markets
The first major price realignment of late summer is in full progress as buyers try to back away from the high prices in the replacement market. The optimism that was present in the deferred feeder cattle futures contracts is all gone and the deferred contracts are now indicating lower prices in the future months with prices well under current cash. Despite the decline in prices forecast for the future, many operators are filling current needs and foregoing operating margins.
The video markets featured many of the characteristics of the auction markets across the country. Fewer cattle were offered on the video auctions and many of the sales lots were passed out. More operators are choosing to market feeder cattle rather than place them in feedlots. The P.O. lots will need to be resold and cattle owners face the prospect of lower bids.
The drought monitor continues to favor herd expansion but the rains never fall evenly across all regions. This time of year it is important to the wheat belt to receive rains in preparation for planting winter grain crops. Wheat grazing is always a factor and availability will help temper and determine the level of feedyard placements. More light cattle will be placed in feedyards this year with lower feed cost and sometimes feedlot gain cost will differ little from grazing cost on wheat fields.
Compared to the last sale two weeks ago: Feeder steers 1.00-5.00 lower. Feeder heifers over 800lbs lightly tested but a firm undertone noted. Feeder heifers under 800lbs 2.00-7.00 lower. Steer and heifer calves 5.00-10.00 lower. Demand moderate. Quality mostly plain. This week sees an increase of unweaned calves. Weigh up conditions were in the buyer’s favor. Supply included: 100% Feeder Cattle (55% Steers,
42% Heifers, 3% Bulls). Feeder cattle supply over 600 lbs was 64%.
Feeder Cattle Futures. Feeder contracts were higher.
The lack of liquidity in the feeder contract provides a perfect environment for prices to move too far in either direction. Poor liquidity leads to extreme volatility. Overdone directional price movements frequently require corrections and traders sense the vulnerability of the contract that needs to be cash settled but the contract index needs a redo.
Feeder Cattle Cash Index. The index is tracking the moves in cash prices.
Video and Internet Replacement Cattle Auctions. The movement from traditional private treaty sales to Internet auctions has been slow but steady. Producers have chosen this option as the primary marketing tool for most of the cattle offered in the replacement markets.
National Weekly Feeder Summary released on Friday of each week tracks the national prices by region for last week.
Grain Futures. Corn was softer as December becomes the spot month. Harvest is close and beginning on the south plains. Storage of last year’s crop is being emptied from bins to make room for what appears to be a bumper crop. Corn basis levels in Guymon, Oklahoma are at $1.10 — basis the December contract.
Many fundamental analysts are viewing the current market conditions as a seasonal decline repeating historic trends that send box prices lower during the mid to late summer only to recover after September as holiday demand improves and temperatures moderate. This scenario paints a picture of cash prices finding a floor near the current price level then rallying into year end. Some see smaller numbers of fed cattle and little increase in cow slaughter into year-end resulting in a cash market back to $190.
The quants or macro-economic traders want to front run a recession. In the face of declining numbers, they see consumers unwilling to stick with high priced beef and turning to alternative cheaper meats. They also see threats to the job market and speculate that if employment levels fall, household budgets will feel the squeeze and beef will suffer. Their view represented by current futures prices takes the cash market another $5 cwt. lower.
It is always difficult for an analyst to call for a price level $15 cwt. above the current futures price. As the saying goes, if you are so smart why don’t you buy the futures. Futures generally represent the consensus price level expectations at any given point in time. The fact that liquidity in the contracts is poor makes it easier for large players to move the futures market but over time those prices will adjust to the conditions in the cash markets.
The implications for cattle owners are dire. High priced feeder cattle bought during the summer months will require $190-200 cwt. to bring returned dollars back to a breakeven. Sales at current futures prices for late year marketing plans will deliver large losses. While the recent decline in fed prices has dampened the demand side of the replacement market, the current replacement values remain marginally unattractive.
Change is a necessity for any sustainable industry and sometimes necessary changes encounter obstacles in the form of stalwarts who refuse change. The Cattle Report has created a library page of opinions pieces published on these pages advocating fundamental and structure changes for the industry.
NOTE TO READERS
Sections of the newsletter are designed with hyperlinks to the appropriate source pages. The hyperlinks are in light blue within the report.
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. Most calculations are basis relevant prices in Guymon, Oklahoma.
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 180 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 are based on the USDA index price for 800# steers and fed cattle sales are $2 cwt. premium the appropriate futures contract.
CURRENT CLOSE OUT
The Cattle Report estimates current profit or loss on cattle placed on feed 180 days ago. This report generated from industry averages attempts to simulate a typical close out based on the feeder index for 800# steers 180 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.
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