December 6, 2024
THE MARKETS
The relationship between the cash markets and the futures is a strange relationship. The latest decline in the cattle futures prices has not been duplicated in the cash markets. Packer bids of $188 were passed and packers were forced to raise prices to $190 to purchase cattle and many sellers were unwilling to sell at $190 — basically steady with last week. Packers continued to need more cattle and on Friday raised prices to $191-$191.50 live and $300 dressed — $1 to $3 higher than last week.
Processors slaughtered 536,000 cattle this past week down 95,000 from the previous week. It is always difficult benchmarking slaughter volumes from a holiday week. The cutout remains above 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. Weekly cow slaughter has remained under most estimates for this fall.
CATTLE FUTURES. Futures remained hesitant to follow the cash price higher. Only the spot December contract posted a small gain with the remaining contract flat or spots lower. Futures are on a rolacoaster ride moving up and down with the most recent movement to the downside with little explanation for the decline. Analysts point to technical signals and charts but fundamental traders see little information forcing the futures to trade several dollars under the cash prices.
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 917# up 3# from prior week and 25# 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 .7% higher at 82.30%. This was 3% 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 attention of the market will turn to the middle meats as the holiday season approaches. Beef features will be highlighted by the ribs that will be popular for holiday fare.
The Cutout. The cutout shot higher on Friday. Holiday demand is good and the box prices seem on firm footing. The grind will receive less attention and the middle meats will be more in demand. Ribs are posting new highs for the year. Prices seem to have found some stability at this level.
Replacement markets
The replacement market has been on a rampage with each day bringing higher prices. The nosebleed prices of yesterday are quickly replaced with new high water marks as competition forces many operators to overpay to play. The light end of offerings of replacement cattle moved into the $400s. The sudden change is driven by new grazing opportunities following generous rains. The jump in calf prices has caused some operators to opt out of this year’s stocker program and take cattle in for grazing. Squeezed margins at the stocker level have opened negotiated pricing for the grazing that is running from .65 cents to .85 cents with care sometimes included and sometimes not.
Competition for stocker cattle has been accompanied by similar results at the feedyard placement level. Cattle feeders are now looking at breakevens from $190-$200 with futures in the mid $180s. Cattle inventories in the feedyard are at a 25 year high but as short supplies of replacement evolve the competitive environment will leave some pens empty.
Imports of cattle from both Mexico and Canada are factors in our stocker and feeder supplies. The discovery of a screwworm cash in Chiapas, a Mexican state bordering Guatemala has caused a disruption and temperary closing of the border. This anxiety is joined with unclear plans for tariffs on imported cattle from Mexico. The implications to re-establishing normal flows from Mexico is not a huge number but is enough to impact prices in a time of dwindling inventories. Mexico crosses around 100,000 head a month to the U.S. and we are at the tail end of the largest volume seasonally. Border officials promise a restoration of normal crossings by year end.
The drought monitor continues to favor herd expansion but the rains never fall evenly across all regions. Broad areas of the plains received welcomed moisture. Many grazing areas will still have time following the rains to see additional growth on the wheat fields. Grazing opportunities have a major impact on feedlot placements but the pool of cattle available for both grazing and feeding continues to decline. News outlets often lag the moisture reports. Drought reports were featured in the news for Oklahoma as rains were covering the area.
Compared to last week: Feeder steers and heifers 2.00-3.00 higher except 700-800lbs 5.00-10.00 higher on improved quality from last week. Steer and heifer calves 5.00-10.00 higher with instances of up to 15.00 higher. Demand good. Supply included mostly weaned calves. Today there was a special angus sale, all cattle denoted with the description Value Added were part of the special sale but not included in the
trend. Supply included: 100% Feeder Cattle (57% Steers, 42% Heifers, 1% Bulls). Feeder cattle supply over 600 lbs was 46%
Compared to two weeks ago: Steer and heifers calves were mostly 10.00 to 20.00 higher, instances as much as 40.00 higher. Demand was very good and buyers very active. Supply included: 100% Feeder Cattle (16% Steers, 83% Heifers, 1% Bulls). Feeder cattle supply over 600 lbs was 8%
Feeder Cattle Futures. Feeder contracts are a cash settled contract assuring participants prices will close to cash. As the cash index moves higher futures must follow. Futures closed the week Friday with higher prices. The overheated stocker and feeder cash prices will make it difficult for the feeder contracts to maintain momentum to the downside.
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 were finding a level trading range then moved higher yesterday. On the southern plains wheat is pricing in and out of some rations. The early tough talk on tariffs may be posturing or may be real. Corn basis levels in Guymon, Oklahoma are at $1.20 — basis the December contract.
THE FAILING GRAIN TRADE
There has been a lot of consolidation in the grain trade. The names of the players are in flux, and as companies merge and acquire, each seeks to create an improved margin in a tough business. Financial difficulties at one of the largest co-ops on the southern plains has been joined with news of accounting problems of one of the largest corporate grain companies.
These are signs of dysfunction, and the implications are relevant to all participants in food production. Grain feeds the country both through livestock, poultry and the various cereals and breads found on our table. The advent and expansion of on-farm storage has created increased competition among the grain companies for the remaining crop production.
Foremost among the problems faced by grain handlers has been the failure to move to the web. Their business was built on a gap in market news that was available to the large companies allowing them to capture margins from farmers who were far removed from the latest market developments. Many of today’s farmers are closer to the market than their counterparts residing in terminal elevators.
The problem has been the failure of the grain trading firms to develop a web based trading platform and electronic back office that includes settlement and clearing. Trade matching on the web is easy but needs to be specific to various grain locales. The trade platform needs to specify origin points across the plains and then auction grain lots from those locations. Farmers with on farm storage need to be allowed to particpate.
Equally important is the digitization of the mountains of paper that accompany each trade. This involves the grain contract, deliveries, discounts, and origin and destination weigh slips. Often the same grain is traded multiple times as traders take positions. Grain companies even use more than one broker offering their grain at differing prices. Eliminating paper and digitizing transactions to include electronic payments would remove millions of lost dollars from the transactions. The grain companies need only look at themselves to find the pathway out of the quagmire.
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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