May 28, 2022

CATTLE MARKET REPORT AND ANALYSIS

Cash Cattle

The wide range of prices continues with packers picking up a few more cattle on Friday at mostly higher live prices of $138 in the south and $142-144 in the north. Market observers have difficulty reading the market when price reporting contains large price ranges. The distinction between tough sellers and weak sellers and/or high quality cattle vs. lower quality is all wrapped up in one on one relationships between buyer and seller reported by USDA in aggregate form. The late sales could have been higher quality cattle that resisted lower bids all week or sellers who finally decided to accept the early week bids. With the wide choice/select spread many scenarios are possible with packers have the upper hand with full knowledge of various trades. The price ranges for the week were $136-138 in the south and $139-145 live in the north. Dressed trades ranged from $222-227.

This past week’s slaughter at 644,000 head was sharply lower than the prior week’s 680,000 but higher than prior year. Several plants cut back on the Saturday kill to give plant workers a long weekend. The weekly slaughter size will determine the current status of fed supplies. Seasonally quality grade declines this time of year due to more calf fed cattle in the north, but then resumes better grading through the summer. Packers can selectively increase grading by choice of purchases and number of purchases. They have less control over formula cattle committed to the plant. The purchase of fewer but higher grading cattle can get them out of step with inventory needs and cause a scramble for numbers at the last minute to pressure higher prices.

Cattle Futures. Futures for live cattle were softer to close the week. The spot June has distanced itself from the cash market and will converge with cash as we enter the delivery month.

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 860#. Weights are 5# 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 up .8% to 81.6%.

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 firmed as retailers anticipate the smaller slaughter next week and the smaller number this week allows more leverage for sellers of beef cuts. The choice/select spread widened to $20. Warmer weather appears to be aiding springtime demand. The slaughter is improving packer margins and they are responding with larger kills. Any slowdown in the number of cows will replace those kill slots with fed animals.

The role of the retailer is critically important to demand for beef. Beef is marketed as a fresh product but under many brands and labels. The decline in the cutout of the past two months has not been mirrored in the store where retailers have held on to high margins set when beef prices were much higher earlier in this year. Today they are attempting to recapture some of those lost margins from earlier periods. Consumer budgets and export demand will be the drivers for beef prices this summer but expect some of the retailers to begin to soften prices at the store.

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, but pork prices seem to be rising in contrast to live cattle. Chicken is high 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.

Replacement markets

Most May cattle have already moved this month. The remaining cattle to move off pasture are finding less active competition from buyers who are unsure of the future for the economy and beef prices. The demographics of feedyard populations is also in flux. As feeder cattle supplies decline, some operations are changing the profile of purchases and new sources of cattle such as the holstein/angus cross dairy cattle are finding regular repeat buying interest from feedyards.

Rain forecast improved in some of the worst areas of drought. The first signs of improving pasture conditions should be a decline in the number of cull cows hitting auction markets across the country accompanied by a slowdown in placements of cattle into the feedyard. Price signals are telling stocker operators to wait to market cattle and market them at heavier weights. Holding cattle to market them later is not an easy task and especially when the higher market promised by feeder futures evaporates as we move forward.

Oklahoma City. — All classes of cattle were lower in response to last week’s falling futures market for fed cattle and feeder cattle combined with rising corn prices.

OKC West  — Prices for calves were $3-6 lower.

Feeder Cattle Futures. Feeder futures were lower as corn moves higher.

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 reversed course and were higher on Friday after hitting $8 and have backing away 50 cents a bushel. The wild card thrown into the grain equation is CRP acres that are coming out of the program at a rapid rate encouraged by government subsidies. The corn basis is rising as repeater trains fail to keep up with demand. Guymon Oklahoma basis is $1.60 over the July contract. 





TRANSPORTATION WOES

Beef is not a product that is manufactured one place then sent directly to the consumer. The path of animals, then beef, through the food chain is a long and circuitous route that relies at each turn on transportation to move from Point A to Point B. This translates into significant added costs to the beef product at the store.

The journey might start with a calf raised in Florida that is sold to a cattle rancher in the Texas Panhandle for grazing, then transported to a local feedyard, then to a local beef plant. The beef cuts then are sent to a grocer’s distribution house, then to a retail store, then packed into a grocery bag for the trip to the consumer’s home. Each leg of the journey from birth to plate involves costly transportation and those costs are skyrocketing.

The story of inflation always seems to focus on gas and food. Pick up any news source and you will find stories chronicling the new highs [either all time or decade records] for fuel. Fuel surcharges are placed on delivery costs for each segment of the journey for beef to the table. Those transportation costs represent an ever increasing percentage of the food dollar and of the gross sales price of beef. These direct costs are further impacted by indirect transportation cost of feed and all the other inputs into the beef production sector.

Unfortunately, beef has more transportation costs associated with it than the competing meats. Both poultry and pork are produced in more contained production facilities where the animals are birthed, grown and harvested within close proximity to each other. They also, because of the nature of the meat product, allow processing facilities to take the ultimate product closer to consumer ready packaging at the processing plant. Many of these meat products are shipped directly to retail stores where they are presented pre-packaged as received.

Beef processors also are now being called on to further process beef cuts and deliver more portion control processing at the plant. Everyone is struggling to overcome labor shortages. The transportation costs can be mitigated by these actions but ultimately the only solution is lower fuel costs. With the summer driving season in front of us and the Ukraine war still raging, relief may not happen soon.



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.