December 2, 2023
Sales of cattle live ranged from $174-$175 in all regions with the bulk of sales at $175. Dressed sales were mainly $275. Live prices were two to three lower and dressed $3-5 lower. Fed supplies are not burdensome and a larger slaughter this week and falling futures will dampen selling interest next week.
The slaughter this past week was 635,000 up 97,000 head from the previous holiday week. The slaughter was 25,000 head under last year. All of the slaughter volumes are well below prior year by 5-6%. The year on year reductions in slaughter are reflective of the decline in the nation’s cattle herd – both cows and fed cattle.
The profile of cattle in many feedlots has changed in the past year. The composite beef/dairy breeds have moved into many feedlots because of year around availability and the fact they occupy space for a year when they arrive. The turnover in the feedyards is diminished allowing the same number of cattle on feed but smaller regional marketing numbers. The composites provide a defensive mechanism for the dwindling beef cattle pool of replacement cattle.
Cattle Futures. Futures fell moving back towards lows established recently.
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 906# up 6# from prior week and 10# 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 1.3% at 81.8%.
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 has declined as deferred futures and packer basis bids fail to provide sellers a profit margin for feeding. The decline of forward contracts pushes more cattle into the cash market where they are sold either as grid or negotiated prices. Not all of these cattle find their way into mandatory price reporting. Nevertheless, more cattle in the spot markets will provide more liquidity to the cash markets. The spread between futures and proforma break-even prices has made it difficult for packers to negotiate forward contracts.
The Cutout. Box prices rose towards week’s end. Processing margins are improving and this should benefit the size of the weekly slaughter for the balance of the year.
Beef Feature Activity Index. The market will now shift to preparations for features for Christmas. The pre-Thanksgiving features were all hams and turkeys. Beef may develop a more prominent position on meat counters in retail stores across the country as consumers tire of other alternatives. Holiday fare will find more consumers living hand to mouth with their eye on the best value and the right time.
The current situation in the replacement markets is indicative of where we are in the cattle cycle. The recent decline of almost $40 cwt. in the feeder futures has failed to dent demand or price for light calves. The light calves have their own unique pricing with long weaned calves selling higher and unweaned offerings lower. Rationing of the declining pool of calves is by price and allocations are currently based on who is willing to take on the largest risk profile. Buying current calves at current prices and building a model based on spring feeder futures would discourage most buyers.
The calf demand has mainly been from operators needing to fill out winter grazing locations that are much more plentiful than last year. Gain deals of $.80-$.90/lb without care, mineral or death loss are a loser for cattle owners. Feedlots also have abandoned ideas of the need to background cattle for next spring’s placement and are quickly adopting a wait and see attitude for purchasing forward contracts. Feedlots can now purchase on the feeder board dollars cheaper than taking the grazing risk of low gains, missing cattle, and other hazards of the trade.
Compared to last week: Feeder steers under 750 lbs. steady to 3.00 higher; few steers over 750 lbs. and feeder heifers 3.00-6.00 lower. Demand for feeder cattle moderate at best. Feeder cattle futures traded sharply lower today, following last Friday’s sharp declines. Steer calves mostly steady. Heifer calves 4.00-8.00 higher. Several weaned calves available and demand very good for these. Moisture fell once
again over the weekend with some areas seeing snow. Northwestern Oklahoma saw up to 8 3/4 inches of snow. Supply included: 100% Feeder Cattle (55% Steers, 44% Heifers, 1% Bulls). Feeder cattle supply over 600 lbs was 45%
OKC West —
Compared to the last sale two week’s ago: Steer calves that were long weaned and under 550 lbs sold mostly steady, heifer calves traded 1.00-3.00 higher under 550 lbs. Un-weaned and remainder of the calves traded 3.00-6.00 lower. Demand for light weight calves suitable for grazing wheat remains good, fleshy un-weaned calves sold with light to moderate demand. Supply included: 100% Feeder Cattle (53% Steers, 43% Heifers, 4% Bulls). Feeder cattle supply over 600 lbs was 23%
Feeder Cattle Futures. Futures fell giving up recent gains.
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 firmed at week’s end. Many traders look for the basis to fall following year end as farmers turn loose of stored grain. Business has generally been good on the farm the past few years and farmers are inclined to push sales into next year hoping to avoid paying taxes on this year’s income. Corn basis offerings in Guymon, Oklahoma are at $1.25 — basis the March contract.
IDENTIFYING TRIGGERS FOR VOLATILITY
Large moves, up and down, are becoming more common in the cattle futures markets. These directional moves occur with little notice or news and generally are not motivated by direct fundamental factors. The causes are the subject of much discussion and debate within the industry and the answer is attributable to several obvious factors.
- POD FUNDS – These are hedge funds making macro-bets on big picture moves in commodities. The largest is Citidal with cumulative investments in all their funds of a trillion dollars. Last year they attributed over half of their income to investments in commodities. An allocation of a small portion of that money in livestock futures could move cattle contracts dollars during a daily session.
- LRP INSURANCE – USDA is moving away from direct subsidies on agricultural products and towards insurance products that limit the downside risk for price. Livestock Protection Insurance comes in the form of subsidized “puts” or options with a strike price to provide the buyer with a floor for cattle pricing. The government must offset the downside risk with their own puts or short positions in the CME livestock futures market. When and how a governmental entity manages this portfolio of products is anybody’s guess but when they do act it will likely cause price disruptions in the futures market. These efforts have tended to be generated towards the end of the week.
- COMPUTERIZED DIRECTIONAL MOMENTUM PLAYS – Funds deploying momentum triggers for order flow when certain price points are reached. This can initiate large volumes of orders to a market not known for high liquidity.
- TECHNICAL TRADERS – Hundreds of technical trading programs are in use in all markets. Prices move with patterns and recognizing and acting on those price patterns is the basis of many of the daily trades. Traders can have periods of success with these programs allowing them to enlarge the scope and volume of orders until they encounter a obstruction to their success.
The order volumes and dollar values from transactions in cattle futures is minuscule when compared to another ag product like corn or soybeans. Those in turn are only a small fraction of the dollar volume of the monster of all commodities – interest rate futures. SOFR contracts or interest rate futures would absorb all the dollars from order flow in cattle for a week without changing a tick.
The result of the movement in prices in the cattle futures market is subject to the oldest of rules. It will continue down until enough people see an oversold opportunity and the market washes out on the downside. Traders however, never set the price for beef. The final arbitrator will be the consumer and what they can afford and the choices they make at the meat counter.
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 redesigned 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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