October 29, 2024
THE MARKETS
Larger inventories will allow packers to be inactive early this week. Smaller show lists will also strengthen cattle owners ability to leverage the market higher. Improving demand and processing margins will keep plant slaughter volumes active.
Last week took the cash prices $2-4 higher than the previous week. Early sales were mainly at $190 live in both the north and south followed by later sales reaching $192 in Nebraska and $191 in Kansas. Dressed sales were mainly at $298 with some late sales continuing at $300-$302 with the high end coming from Colorado. Large volumes of “over the top” sales at $1-2 over the top price continue to be unreported by Mandatory Price reporting.
The monthly COF report contained few surprises with only a small variance in placements from pre-release forecasts. The take away was the obvious indication that the herd rebuilding expected for several years is going to be a slow rebuilding not a quick one like the one following the drought years of 2011-14. Rebuilding is not jump started by massive holding of heifers for breeding. Heifer placements are showing only minor decline. The growth of the calf crop is coming more from cows held another year than newly breed heifers. The cow kill that normally increases significantly in the fall when summer grass goes dormant, is barely moving higher from summer lows.
The news this past week was twofold — larger slaughter volumes and rising box prices. This past week’s slaughter was 623,000 up 15,000 from the previous week but 12,000 under last year. The increase in the cutout went a long way towards stemming the red ink in the beef plants. The choice cutout has now moved up $23 from recent lows just under $300. 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. Despite the large slaughter this past week, box prices closed the week higher.
Cattle Futures. The futures were modestly higher as traders await signals from the cash trade. Futures have flatlined for the next contracts carrying into April of 2025. December will be the spot month at the end of this week.
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 921# 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 .8% lower at 81.00%. 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 story of the cutout has been the strength in the grind. The 90% grind has dominated the value of the cutout, joined by good demand for the 81% and the 50%. Over half of all beef sold is from the grind. The reduction in the cow slaughter has provided a foundation for this strength, but as the season’s change, the grind is seen as toppy and has declined in all of the blends.
The Cutout. The cutout opened the week stronger on choice cuts and weaker on select making the spread over $30. Retailers are readying the meat counters for the holidays.
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. Choice beef is becoming the standard in beef marketing plans.
Replacement markets
Occupancy levels are varied with some feedyards choosing to leave empty pens rather than purchase high priced feeder cattle. Kansas has several custom feeding yards that depend on customers who seem reluctant to gamble on finishing their cattle. Both Texas and Kansas are placing less cattle while Nebraska places more. Grain basis levels always favors northern locations but also the threat of severe winter weather.
Summer gains across the high plains on native grass is often difficult to predict. Many factors impact daily rate of gains on yearlings or calves and moisture is only one. Conditions can be too wet and, if rains never stop all season, the grass becomes washy and gains are often disappointing. Warm dry periods to the naked eye appear to harm the grass and make it brown, but they can produce the correct maturing process and record optimum gains. Preliminary results this year are indicating an excellent year for gains on native grass and cattle moving to the feedyard are generally heavier than usual.
The percentage of new crop calves that are weaned increases each year. Producers have discovered that weaning in place delivers more value to the producer than accepting the discount at the marketplace. Because a large amount of calves come from small herds, some breeders are not equiped with labor or facilities to carry on weaning support systems. Prices are sufficiently high that many just want to cash in the calves and move on. Likely to develop soon will be new vaccines making weaning easier and less stressful to the animals.
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 receive additional rain to further progress for wheat grazing. The plains has been specially dry the past two weeks and some early planted grain fields will require more moisture. Moisture possibilities have improved for this weekend.
Compared to last week: Feeder cattle and calves steady. Demand good. The market continues to hold together as slaughter cattle prices move higher. Quality mostly average. Rain is finally in the forecast for mid-week and better chances this weekend. Supply included: 100% Feeder Cattle (54% Steers, 43% Heifers, 3% Bulls). Feeder cattle supply over 600 lbs was 56%.
Feeder Cattle Futures. Feeder contracts were modestly higher as corn prices fell to start 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. Grains were lower to open the week. Forecast of limited rainfall in the plains this winter from La Nina threatens the health of winter crops. Harvest is proceeding in full force with many areas with the southern plains mostly completed. Measurement of crop yields will begin to be estimated by private sources. Corn basis levels in Guymon, Oklahoma are at $.90 — basis the December contract.
IS THE SMART MONEY MAKING THE RIGHT CALL
A quick review of the futures contracts reminds us the consensus of price forecasting is calling for flat prices from now through the first half of next year. The proposition that fed prices have found a ceiling beyond which cattle owners will be unable to penetrate is disappointing to many who find future breakevens rising above the current price level. It also is a reminder that futures prices do not make the cash market.
One school of thought has cattle backing up in the feedyards as evidenced by rising carcass weights. This theory holds that cattle owners are registering the price advances by showing fewer cattle each week and forcing the processors to pay up while all the time the numbers are building in the feedyard. The glut will at some point start to weigh on the market.
The counter to this proposition is cattle owners are simply using the tools available to respond to increasing breakevens. Simple economics guide cattle owners to add more pounds when feed prices allow the additional pounds to be below the selling price and discounts for heavy carcasses don’t negate the incremental gains. Packers are currently encouraging heavier carcasses in an effort to hold total beef production to a level that is able to meet current demand. Longer feeding periods translates into less turnover. The replacement pool continues to decline.
The threat of pricing beef out of the market and encouraging consumers to choose alternative meats is possible. Beef will tread a fine line in the future between price points and demand destruction, but retailers will find ways to manage the margins to keep the right mix and price points on the shelf. Beef exports have remained surprisingly strong this year despite competition for South America and Australia.
Cattle futures have been unwilling to lead the market. Historically, most years feature large premiums in the February and April contracts over the October in the current time frame. This year they are flat priced with today’s cash. This leaves the holiday season when beef often gets a boost with no premium and the first few months of next year when live prices typically peak for the year, all selling par to today’s market.
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.
Contact Us
The CATTLE REPORT will strive to answer all emails. Our editorial views are not always popular and sometime create controversy and are sometimes flat out wrong.