April 27, 2024
THE MARKETS
The marketplace always carries the potential for surprise. Early week disappointment from steady sales in the south, turned into late week optimism caused by advances in price in the north. Mid week sales at $182 in the south were followed by $1-3 advances in the north with live sales from $184-$186 with outside tops of $187 in Iowa. Dressed sales were at $294 — $2 higher than last week. Packers even added a few more cattle in Kansas at $183-$184.
Beef production has been held up this year from increasing carcass weights. The impact of lower feed cost has been to encourage heavier carcass weights. This is also springtime, when feeding risks from a winter storm are mostly gone. The extra weight currently represents another 10,000 head of cattle when compared to last year. Added to the heavier cattle is higher grading. This is contra-seasonal and grading should be declining as more calf feds are moving into the slaughter mix.
The large decline in cow slaughter this year has notched a permanent dent in the weekly slaughter. This week’s slaughter at 613,000 was down 7,000 head from previous week and down 13,000 head from last year. The fed cattle portion of the weekly slaughter is up however as cow slaughter continues well under last year. Processor’s margins continued to struggle with market moves in cash and beef insufficient to restore positive returns at the plant.
Cattle Futures. Futures exhibited price gain follow through to close the week. Charting the price movement for Thursday will give pause to those trading futures. The interim moves during the day were in dollars with the final rally moving futures up almost $5 in the June contract from the daily low.
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 890# up 4# from prior week and 33# 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 1.1% at 85.50%.
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.
Consumers are losing interest in premium beef products on the shelf at most supermarkets. The Never/Never antibiotic and hormone free high priced cuts are finding more difficulty in movement off the shelf. This in turn has forced mark downs for many of these products and threatened already thin margins. Wagu highly marbled steaks are also disappearing as consumers back away from luxury cuts.
The Cutout. Box prices were mixed in late week trading. The box prices were surprisingly stable when considering the large slaughter the past two weeks. Spring prices generally change the relationships between the various cuts. Traders will watch for signs of improvement in the middle meats as we push forward into spring and temperatures warm and cookouts increase. The workhorse in the cutout has been the 90% lean that has held up the entire cutout with super high prices as the cow slaughter slows. Now if the 90% leans holds and the middle meat rally, it could turn around the box prices.
Replacement markets
Feedlots are finding little relief from high priced feeders. Feedlots are pushing to fill empty pens as April placements fall dramatically from prior year. The competition for feeder cattle heats up and breakevens rise dollars above the fall CME live cattle contracts. The decision of whether to buy a known loser or leave the pens empty is the question before many feedyard operators.
The drought map for the United States is revealing. This spring there are few spots in the country suffering extreme drought and the map shows a profile ideal for restoring the nation’s breeding herd. Improving genetics and heavier out weights for fed cattle will fill in some of the shortages in the beef industry but more animals are necessary to regain beef proper market share of the meats.
Market observers will begin to look for signs of a reduction in heifer placements on feed, but this most recent COF report indicated the reduction in heifer placements has yet to occur. Heifers on feed were at 4.5 million head indicating little or no reduction from last year. The reduction will likely occur during the second half of this year and this will be disruptive to Cattle on Feed numbers. Obviously, there will be more steers on feed compared to heifers and those steers will be fed longer. This in turn will reduce turnover and mean less heads for slaughter slots. Heifer retention also will reduce the calf pool available for grazing and growing. Conditions are now right for the rapid rebuilding of the nation’s cattle herd.
Compared to last week: Feeder steers and heifers 4.00-8.00 higher. Steer and heifer calves not well tested but a sharply higher undertone is noted. Demand good. Quality average to attractive. Last Friday’s COF report mixed with lower than expected On Feed and Placements. Cattle futures reacting positively and trading well in the green. Supply included: 100% Feeder Cattle (56% Steers, 43% Heifers, 2% Bulls).
Feeder cattle supply over 600 lbs was 80%
OKC West —
Compared to last week: Feeder steers sold steady. Feeder heifers traded 5.00-10.00 higher, Demand remains good for feeders. Steer and heifer calves that were long weaned with multiple rounds of shots sold steady to weak. Remainder of the offering traded 2.00-4.00 lower. Demand moderate to good. Supply included: 100% Feeder Cattle (66% Steers, 33% Heifers, 0% Bulls). Feeder cattle supply over 600 lbs was 83%.
Feeder Cattle Futures. The feeder contracts posted triple digit gains to close the week.
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 prices stabilized this past week while wheat futures jumped higher. The spread between corn and wheat pointed feedlots back to corn for a grain source. Good rains in the corn belt are setting the stage for favorable plantings. Corn basis offerings in Guymon, Oklahoma are at $1.35 — basis the July contract.
MACHINE LEARNING AND AI
It didn’t take this past week to remind us of the erratic and sometimes irrational moves in the Live Cattle Futures on the CME. The patterns have been developing over a period of years and the latest volatility has only confirmed the existence of disruptive trading patterns to both daily and trend lines.
AI and machine learning are not new to the markets. Once the trading moved out of the “pits” and CME turned on Globex, the electronic trade matching platform, it forever changed the way trades were matched but it also changed the dynamics of the interface between humans and the markets. The first sign was the advent of “flash traders” or trade platforms that moved closer to Chicago hoping to gain nanoseconds in speed and trade execution. This delivered the architecture for the future.
New developments have occurred in the past year when computerized scans of the internet search for market sensitive information and software programs convert the news item into an order entry and trades are consummated on the public markets. It doesn’t matter whether the trades are commodity or stock transactions. The objective is fast execution of market sensitive information delivered before the public can react on those same markets.
These new developments present a problem for the livestock markets. Currently the construction of the futures contracts is flawed causing many speculative traders to avoid the markets for fear of delivery of loads of cattle in Clovis, New Mexico – a situation no trader wants. They also don’t want the penalty associated with declining the delivery. The result is poor liquidity in the cattle contracts and on occasions when bots create and deliver large orders, the natural result is outsized moves in prices.
The large feeding companies believe the delivery feature advantages the hedgers. Only shorts can deliver, denying longs the equal opportunity to call in contracts. This is flawed logic and prevents the CME from converting the contract to a cash settlement contract that would not only increase the trade volume and expand trading to more contract months, but would provide the volume necessary to handle the large order flows from computerized trading.
AI and Machine Learning algorithms are not evil. The same scans might be turning up news stories favorable to beef prices and the order flow would cause large gyrations to the upside. The harm is the volatility that makes all participants in futures trading subject to whimsical and irrational moves in prices. A producer attempting to lock in a $50 margins might find themselves with a $50 loss in a period minutes on the exchange.
CATTLE REPORT LIBRARY
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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