July 21, 2024

THE MARKETS

The available supplies of cattle are adequately serving the sharply pared back full week slaughter. This week’s slaughter at 584,000 represents one of the smallest weekly non-holiday kills in many months. Trading in the south was mainly at $188 live, while live sales in the north were reported at $196. Dressed sales in the north were mainly at $310 – both were $2 lower. Packers chose to cut the slaughter rather than buy more cattle.

A sharply smaller slaughter will test box prices. Slower summer demand for beef will get a jolt when retailers wake up to the forced slaughter reduction. The dynamic price action this creates will set the stage for packers to manage the coming week’s slaughter volume, but union contracts in the beef plants will guarantee plant workers certain hours in most cases 36 hours per week. For the high volume beef plants trimming the slaughter increases the per head processing costs. Certain fixed costs do not change with smaller volumes, only the variable costs fall.

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.

USDA COF FOR JULY 1

The July COF report includes a breakdown between steers and heifers on feed that should be a preview of the heifers held back for breeding and in turn a status report of where we are in the cattle cycle and rebuilding of the national herd. Heifers on feed were flat to barely 1% under last year which should signal little rebuilding and mean rebuilding is still further down the line. A possible explanation of the surprising large heifer feedyard inventory would be the increasing number of dairy/beef cross heifers placed on feed. Quantifying that number would be helpful and parsing out beef heifers held back for breeding.

Placements reductions surprised many analysts but June is not a large placement month and the pool for replacement cattle continues to decline. The most interesting aspect of the report was the distribution of placements. A quick look at the three major players, Texas, Kansas, and Nebraska, gives the industry insight into developing trends. Kansas placements were sharply lower with Texas and Nebraska mostly flat.

ACTUAL vs.AVERAGE GUESSES
CATTLE ON FEED......July  1....101.....101.2
PLACED DURING........June.......93......97.0
MARKETED DURING......June.......91......91.8

Cattle Futures. Futures prices were uneven with advances in the front end. Hedged cattle feeders are enjoying extra large basis premiums and some begin to unwind positions held for the next month’s fed cattle sales.

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 887# up 2# from prior week and 29# 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 down .1% at 82.70%.

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.

Beef Feature Activity Index.

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. The attention and focus for lower prices has been the middle meats. Both ribs and loins have been sharply lower reflecting the lack of interest in high prices cuts during the heat of the summer. The surprising small slaughter this past week will challenge box prices to respond.

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.

The video auctions are marketing large volumes of cattle for current through fall delivery at record prices. The prices that are reported will set a super high breakeven point for buyers. Some Dakota light calves weighing just over 300# sold just under $5/lb.. Margins at all levels of beef production are suffering and whether you buy calves or yearlings, the risk factor is moving sharply higher. Feed prices are forecast to be lower and corn futures have fallen but none of those cost have declined sufficiently to margin a profit for those operating in the beef pipeline — except the breeders.

Competition always challenges buyers to overpay for replacement cattle. Its human nature to rationalize reasons to buy until you get burned. Much of the industry is awaiting punishment for overpaying for replacement cattle. Futures are warning buyers of losses to come, but until they are materialized, the competitive spirit will continue.

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.

Oklahoma City. —

Compared to last week: Steers and heifers 4.00-8.00 lower. Demand moderate. Quality average with some fancy drafts. Supply included: 100% Feeder Cattle (57% Steers, 41% Heifers, 3% Bulls). Feeder cattle supply over 600 lbs was 69%

OKC West  —

Compared to last week: Steer and heifer calves sold steady to firm. Demand good. Supply included: 100% Feeder Cattle (56% Steers, 42% Heifers, 2% Bulls). Feeder cattle supply over 600 lbs was 30%.

Feeder Cattle Futures. Feeder contracts posted losses in front of the COF report and Monday will likely turn those into gains with the small placement numbers. The feeder contracts have developed a cautious opinion of future prices for replacement cattle. Very little variance from the current spot month to any trading month into the future.

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 and wheat prices moved in opposite directions with corn lower and wheat higher. 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 $1.75 — basis the September contract.

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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