July 26, 2024
THE MARKETS
The short bought needs of packers, hoping to buy the next batch of cattle lower, sometimes backfires. Instead of finding the next batch lower priced, they are finding themselves short bought and squeezed into paying higher prices. The early week trades at steady to firm prices turned into $2 higher prices in the south where sales were mostly at $190 live with some live prices up to $195 in Kansas. Additional cattle were purchased in Kansas delivered to Nebraska taking them out of the Mandatory pricing scheme. In the north volumes of sales were light with live trade at $198 and dressed at $312 — both $2 higher than last week. The spread between north and south is narrowing especially in Kansas.
A sharply smaller slaughter last week has failed to jump start the box prices. Slower summer demand for beef will be tested again this week as packers struggle with short supplies of fed cattle and struggle even more trying to raise box prices. The dynamic price action this creates will set the stage for packers to hold a governor on slaughter volumes in an attempt to regain leverage on box prices.
This past week’s slaughter at 584,000 down 17,000 from the previous week and down 42,000 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.
Cattle Futures. Futures prices are mixed to close the week. This week posted large gains in the front end and narrowed the basis with cash prices. Short sellers in the spot August contract are feeling a squeeze and some hedged feeders, thinking futures were headed lower, are suffering from misjudgements.
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 892# up 5# from prior week and 36# 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 .4% at 83.10%. This was almost 2% 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.
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 lower with longer fed cattle providing more choice cuts. Cheap feed has pushed cattle to heavier weights and better quality grade and narrowed the choice/select spread when compared to last year. Both ribs and loins have been lower reflecting the lack of interest in high prices cuts during the heat of the summer.
The strength of the U.S. dollar has been detrimental to our export markets for beef. Japan, one of the largest buyers of our beef, now requires 160 Japanese yen to buy $1 of beef compared to 140 yen last year. The same story is playing out with the Mexican peso that requires 18 to buy $1 of beef compared to 16 last year. Currency exchange rates can be important for our foreign trade.
Replacement markets
Feedlot placements move first to the larger more efficient feeding operations. The lost feeding capacities are always found at the margins where inefficiencies are most prevalent. Those include grow yards and feeding operations with antiquated feed mills or pens. In the north, feeding facilities are smaller and more disbursed geographically. Farmers in the north might choose to feed cattle one year and to pass on buying cattle the next. In the south some large corporate yards run fully hedged operations and during periods of margin stress, some of those yards will struggle. So long as the pool of replacement cattle is smaller, some feeding capacity necessarily will be lost.
One of the casualties of lost capacity are those feedyards who rely on customers to fill the pens. Custom feeders who want to own no cattle of their own, are finding it more difficult to solicit customers. Some have even resorted to paying fees to brokers to recruit cattle but having little success. On feed numbers in Kansas, where several large custom feeding yards are located, has been declining.
The drought monitor continues to favor herd expansion but the rains never fall evenly across all regions. Floods in south Texas, tornadoes across the mid west and dry spots in the west show the disparate weather patterns that always are part of agriculture. Cattle movements frequently reflect the grazing conditions of the origin locations. Heat now becomes a factor and parts of the south and southwest are already in stress.
Compared to last week: Feeder cattle and calves steady to 4.00 higher. Demand good. Quality plain to attractive. Supply included: 100% Feeder Cattle (51% Steers, 45% Heifers, 4% Bulls). Feeder cattle supply over 600 lbs was 58%.
OKC West —
Compared to last week: Steer and heifer calves were to lightly tested for a true trend, however a higher undertone was noted. Demand good. Supply included: 100% Feeder Cattle (56% Steers, 34% Heifers, 9% Bulls). Feeder cattle supply over 600 lbs was 32%.
Feeder Cattle Futures. Feeder contracts posted more gains with the strength in the cash cattle and lower grain on Friday.
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. Grain futures turned mixed – corn up / wheat down. Feedlots are turning away from high basis levels on corn with wheat pricing into the ration. There comes a point during the crop year when risk to a crop failure become more remote and this situation is developing with the corn crop. Corn basis offerings are beginning to weaken. Corn basis levels in Guymon, Oklahoma are at $1.60 — basis the September contract. The corn basis in the Texas Panhandle had recently moved above $2 and has not fallen back to $175.
Over the years on farm storage of corn has increased and now competes with grain elevators for marketing prices to feedlots. As corn prices have declined this year, some farmers have fought the market waiting for a rally to market on farm stored grain. With harvest nearing many of those grain owners will need to clean their bins to prepare for what appears to be a good crop. This should pressure the basis in the final stages of marketing old crop corn.
THE FRAGILE STATUS OF PREMIUM BEEF PROGRAMS
Any consumer with the ability to test, verify or confirm the added value from a beef cut bought at the store under a premium program banner, will likely find no added value vs. a generic USDA federally graded product of the same category. There may be a “feel good” quality in the purchase but very little material benefit is delivered. The programs are mainly marketing schemes to add margin to sales. The programs are costly to manage and require segregation in the beef coolers.
Inflationary times expose the weaknesses of many of these marketing programs as consumers try to pinch pennies to make food budgets work. Consumers are inclined to strip away the fluff and concentrate on the substance of the product during periods when they feel the pressures of the household budget. The generic commodity type beef product offered in many varieties has achieved worldwide acclaim as one of the healthiest, safest, most tasty meat product on the counter. As consumers move to more ground beef, the premium programs become meaningless.
Breeders are now discovering dwindling interest and declining premiums attached to programs such as CARE, GAP, verified natural, and NHTC among others. The marketing schemes hawking meaningless terms such as “grass fed”, are quickly losing favor with retailers who are looking to protect precious margins at the beef counter. The third party verification parties, who add much unnecessary cost to those programs, are looking for a new niche.
The brand of the future will share many attributes with the most successful brand today – Certified Angus beef. The consumer is looking for consistently reliable products at reasonable prices. Consumers understand they will need to pay more for quality but will be more distrustful of hype and fluff.
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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