June 28, 2022

CATTLE MARKET REPORT AND ANALYSIS

Cash Cattle

There was little to no trading yesterday as box prices surprised even the expert forecasters by rising $3 in what was expected as a post holiday lull. Bids of $137-138 on the online fed cattle exchange failed to generate any sales today. Packers will be purchasing for a holiday shortened week and inventory needs will be proportionally reduced. They will hope to use the occasion to lower prices as cattle owners while cattle owners hold for higher prices as show list shorten in Kansas and Texas with small increases in Nebraska and Colorado.

Price spreads widened between north and south this past week. Northern live sales were mostly $146-150 while live sales in the south were mainly at $137-138 creating the largest regional spread of recent years. Dressed sales this week reached $240 and assuming a 63.50% carcass yield, the sale is the equivalent of $152 live. The regional range of prices for fed cattle would be $137-$152 or $15 cwt. — a historic high. Dressed prices were higher with live prices steady.

This summer’s price for fed cattle will be determined by how many cattle have been pulled forward because of high feed costs. The low prices built into the August live cattle contract are little incentive to hold on to cattle. Cattle owners in the southern plains have pulled the trigger on sales quickly and those sales may provide relief later as August cattle are marketed now. In the north short numbers are allowing cattle owners to market early and obtain favorable prices. Most of the cattle currently closing out are showing $100-$150/head losses.

Cattle owners know the dangers of projecting this spread into the future. Nevertheless, most purchases of feeder cattle were flowing to the north where some cattle feeders are willing to project ongoing basis premiums. While grading historically is higher in the north, it is not $200/head better and even the dumbest packer knows enough to differentiate value between a Kansas steer at $137 and a northern steer at $150. Even with high transportation costs, expect more cattle from Kansas to be moving north.

This past week’s slaughter at 666,000 head was flat with the previous week and only slightly larger than last year. The heavy production of the past few weeks has placed plenty of beef for absorption into the marketplace. Retailers, purchasing for a post 4th of July period, will be cautious with inventory levels — not wanting to have excess inventories if consumer demand fades.

Cattle Futures. June live cattle remain well under the cash for the expiration this week of the contract. Futures posted modest gains.

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 flat at 853#. Weights are 2# under prior year. 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 also flat at 80.3%.

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 number of cattle contracted for future delivery is in a major decline. The result is we will be seeing more activity in the cash markets. Most of the current contracts for future delivery are dairy or dairy cross cattle with very few beef cattle under contract when compared to more normalized years. The reasons are fairly simple — high feed cost to finish cattle and insufficient board prices to support breakeven levels.

The Cutout. The cutout was jumped higher to start the week. Export business showed signs of recovery. The past few weeks have been damaging to processing margins — a trend that may continue into summer. Look for retailers to give up some margins as we move past the 4 of July in an attempt to hold on to consumers who are finding their budgets pinched mainly on food and gas.

Beef Feature Activity Index. Price competition will determine the role of beef in marketing plans for this summer. Dollar for dollar, pork is probably the best buy, and pork prices seem to have become untethered from the other meats. The Smithfield closure of their California plant will curtain some pork production and exports have been weak for pork. Chicken prices are high driven by sky high grain and consumer tolerance for repeat buying is low. With inflation cutting into the budget of many households, price savings will become increasingly important to consumers. More beef will be directed to the grind that has maintained unusual strength all year. It also attracts more imports of lower quality beef.

Replacement markets

Summer movements of cattle are slowing and as they slow, feedlots are finding bidding extremely competitive for the reduced offerings. May placements were the . Heavy weight cattle are popular for placements with cattle cost in some instances lower than costs to add pounds in the feedyard. This summer will start a period of smaller placements that will not be likely to change for several years.

Oklahoma City. — Uneven prices prevailed with some classes higher and others lower. Cooler weather and moisture helped demand for calves.

OKC West  —

Feeder Cattle Futures. Futures moved higher with the crash of corn prices. Many hedged stocker operators are complaining of the poor basis bids for feeder cattle. The poor bids are pushing more cattle to auction barns where feedlots compete with each other for limited offerings.

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 have lost much of the recent price gains as more favorable weather dominates trading. Friday’s USDA crop report will feature the number of acres for corn and soybeans. Private sources are expecting corn acres to rise. Weather also will determine the status for this year’s crop and estimated yield during July. The gap between July and September corn price is narrowing as grain offering basis levels switch from July to September.

JUNE 1 COF REPORT

                        U.S. CATTLE ON FEED ESTIMATES
                   IN YARDS WITH MORE THAN 1,000 CAPACITY
                                                  AVERAGE            RANGE
                                   ACTUAL       OF ESTIMATES     OF ESTIMATES
CATTLE ON FEED           June           101            101.5      101.0-101.9
PLACED DURING             May            98             99.8       99.0-101.6
MARKETED DURING           May           102            103.0      102.4-104.1
A slightly friendly report with placement and on feed numbers down slightly from pre-release guesses. 

PROJECTING A RECESSION

A quick look at December Live Cattle prices tells the story of the toll a recession has for cattle and beef prices. Retailers have held on to margins in the store following tough times during the run up in beef prices earlier this year. Current conditions are changing their ability to hold on to margins and store and portion discounts are becoming common to clear the beef. Beef is still a perishable item.

The December Live Cattle Contract is currently selling in the mid-$140s – about on par with the current market. No one believes there will be the same number of fed cattle available in December and everyone agrees December should be seasonally a better demand period. Placements of cattle on feed are on track for monthly declines well into the future. The reason for pricing the December board par with current sales is anticipation of a severe decline in demand for beef. The futures are telling us we will sell many less cattle for less money.

The cost to produce a 1400# steer in December is not $145. An 800# steer purchased in the current market for $165 [index price] is expected to feed for $1.40 resulting in a breakeven of $160 — resulting in a -$15 cwt. loss. This is not sustainable, but recessions never are. Losses discourage bad behavior. The losses in various segments of the economy are designed to correct imperfections in product pricing. High food prices slow demand. The Fed aids the process with monetary policy by raising interest rates.

The ag sector will make the many adjustments to errant prices both in absolute terms of price and in basis levels. Basises for both cattle and grain are currently distorted. Expect some relief in basis distortions as fuel prices fall from waning demand. Transportation woes will decline, and regional basis differences for cattle and grain will narrow as trucks become more available with cheaper fuel.

The wild card will be beef demand and demand will depend on price. Today’s high prices for beef will find relief from sources that profited during the run up – processing and retailing. Fewer cattle will allow producers to find improved leverage in bargaining and retain more of the food dollar than the past couple of years.  Retailers will be forced to concede margins to move product.

All of the impacts of a recession will set the stage for rebuilding the numbers of cattle. The slow process of rebuilding the national herd will always require help from Mother Nature. Even with the best of conditions, the rebuilding will not take place over months but years. In the meantime, beef will be squeezed as culling rates decline and heifer placements on feed are pared back for breeding.



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

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.