August 17, 2022
CATTLE MARKET REPORT AND ANALYSIS
Futures corrected Tuesday to reflect underlying fundamentals in the cash markets. Box prices continued higher, carcass weights declined, and beef demand remains robust. Only a handful of cattle sold Monday in Iowa at $146 — steady with last week. Tuesday signals from the cash markets lit up. Nebraska sold cattle from $151-$153 with the later sale delivered — $2-4 higher. Cattle owners are pricing cattle sharply higher slowing early week sales.
Energy prices have the most direct impact for our economy affecting the cost of just about everything. Transportation cost is a major component of all goods and services delivered to consumers and nowhere is the result more important than in the cost of food. Moving live cattle, then distributing beef, is a major cost factor in the cost of beef in the store or restaurants of the nation. Oil futures have now moved from a high of $125 to $80+ in the deferred contracts. Nationally, both gas and diesel have fallen 25% from their highs.
Total weekly slaughter volumes will moderate until after Labor Day as processing margins narrow. This past week slaughter volumes were 647,000 down from 651,000 the previous week but up from 636,000 last year. As we move toward fall, fewer cows will be included in the slaughter mix requiring more fed cattle to furnish beef demand. Pulling more fed cattle from the available slaughter pool may hold carcass weights from seasonal increases historically noted into fall months.
Cattle Futures. Live cattle shot higher following the misjudgments of Monday. Traders are careful not to lead the market, but respond to the increases in cash prices. Nebraska cash sales should help build a foundation for futures prices as sales in the north reach levels where the December contract is priced.
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 down 3# at 864#. Weights are 4# under prior year. Seasonally, weights have bottomed and slowly trending higher, but packer pulls on the feedlot supplies might exceed the supply causing a counter-seasonal move in carcass weights. 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 .5% at 80.1%.
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.
The total number of forward contracted cattle as of early August in all months is approximately one third lower than last year. This will provide more liquidity to the cash markets as packers are pushed into the spot market for more of their weekly slaughter needs. The spread between futures and proforma break-even prices has made it difficult for packers to negotiate forward contracts.
The Cutout. The choice cutout prices continued higher for the second day surprising the analysts who forecast lower prices all week. Last week a trimmed slaughter number tightened box supplies. Packer margins lost over $100/head this past week as the cutout fell and live prices rose. The choice/select spread has stabilized around $25 and this promises to continue the premiums for cattle in the north.
Beef Feature Activity Index. Price competition will determine the role of beef in marketing plans for the balance of this year. High feed cost has pushed chicken prices sharply higher. Lean pork futures are in rally mode. Retail stores are struggling to find good margins on the meats. Beef is holding on to its fair share of the meat dollar with the most interest in lower quality cuts.
The decline in gas prices has freed up some tightness in the household budgets. Also cost of living adjustments from inflation have contributed to increases in retirement income. Job growth also remains healthy and people with jobs are good customers for the beef business.
Replacement markets
Rain and cooler temperatures will moderate cattle movements across the plains. Texas will post large placements for July dictated by heat and drought, followed by much smaller movements moving forward because there remain few cattle to ship. This year will show an interruption of more normalized movements of cattle to feedlots. With the dwindling supplies of replacement cattle, this fall’s placements will drastically and dramatically show the full impact of herd liquidation. Feedlots will struggle to fill pens and competitive bidding will force some pens to go empty.
Proforma breakevens calculations are at the core of every feeding operation. Volatile grain prices, rising interest rates and uncertain basis levels for future fed cattle sales are all consolidating to make these calculations more difficult. The squeeze felt by the feeding operations is now felt by stocker operators faced with the purchase of sky-high calf prices for grazing this winter.
Oklahoma City. — The lighter the weight of replacement offerings, the stronger the demand. The prospect for rain across much of the region has buyers thinking about winter grazing opportunities. All classes of cattle were sharply higher.
OKC West — The narrative posted in the USDA report says it all. Steer calves over 450 lbs. steady to 5.00 higher; under 450 lbs. and where tested, 10.00-20.00 higher
Feeder Cattle Futures. Feeder futures jumped higher with new optimism in fed prices and cheaper grain.
The strong undertone in replacement prices is a function of the reduction in cattle numbers outside feedyards. Futures will continue to have upward pressures from diminished numbers but the headwinds will be grain prices.
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. Grain prices seemed to have found support after two days of declines. Crop ratings are often deceptive with changed conditions by the time the crop report is published. Traders are always forward thinking rather than reacting to past events. Favorable weather and news of a slowdown in the Chinese economy helped increase the supply and decrease the demand for grain and soy products. Both the basis and the prices of corn are moving lower as we approach new crop harvest. Current basis offerings in Guymon, Oklahoma is $2.20 over the September contract. Dealers are beginning to offer new crop corn at $1.50 over the December contract basis Guymon.
ONLINE TRADE MATCHING
The logic behind moving cash trades in the physical commodities used by agriculture to the web is unassailable. The rock-solid benefits of improved pricing accrue to both buyers and sellers. Allowing best buyer in the marketplace to find best seller in a centralized marketplace is a unique quality that only the internet can provide the owners of the products.
Central Stockyards provides an online exchange for marketing fed cattle to the processors. The trade matching engine is simple and easy to use. The exchange provides the sellers the ability to offer current cattle, future deliveries, and grid sales. It offers all the requirements for any transparent market and provides a needed and necessary platform to the industry. So why do users only consummate very few transactions since inception?
The answer is complex. First, Buyers do not want transparency. They would prefer to deal in the world of opaque markets where pricing is not straightforward or easily discoverable but is hidden in poorly designed USDA mandatory price reporting data that fails to include critical data such as over the tops and formula pricing. This leaves most trades to telephone calls and non-transparent terms instead of a publicly available price.
Second, the online exchange fails to provide enough volume to command the interest of Buyers. Once the volume of offerings on the exchange reached a level that requires participation, the markets will begin to provide a window to real price discovery. Currently sellers find it necessary to accept below the market prices to consummate a sale. Most reserve prices can protect sellers from this outcome.
Trading in stocker and feeder cattle is more difficult because these offerings require an disinterested third party to confirm the status of the offering. Allowing sellers to describe their own cattle would result in too many disputes between buyers and sellers. A proper online exchange will provide the necessary objective evaluation and be accountable to buyers for the result.
Centralized trade platforms will be the future for trading in physical commodities. To be successful they need to settle and clear the financial side of the transactions. Smart contracts will settle and clear the funds for each transaction and provide email confirmations to both parties to the transaction. Both grain and cattle are candidates for online trading.
CATTLE REPORT LIBRARY
Below are links to articles published in the Cattle Report pertaining to industry change. Two important changes are on the table for progress — supply chain management and animal ID. Both applications will transform and disrupt the industry.
THE Beef Blockchain Slide Show
The Case for National ID for Cattle
Reforming the Futures Contract and Cash Trading of Cattle
NOTE TO READERS
Sections of the newsletter are redesigned with hyperlinks to the appropriate source pages. The hyperlinks are in light blue within the report.
FURTHER NOTES AND 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.
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 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.
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.