October 21, 2024
THE MARKETS
Cattle owners in the north and south will begin the week pricing show list cattle at $190. Packers will survey the show lists today and trading will likely be pushed to late week. Packers margins improved and this will likely hold the slaughter volumes above 600,000. The fall run of cattle is in full swing to feedyards but the pool continues to decline.
Both northern and southern cattle sold mainly at $188 with ranges from $187-$189. Dressed sales were mostly at $296 — steady with a few late sales up to $300. The pricing differential has all but disappeared between the north and south.
The news this week was twofold — larger slaughter volumes and rising box prices. This past week’s slaughter was 608,000 up 22,000 from the previous week but 29,000 under last year. The increase in the cutout went a long way towards stemming the red ink in the beef plants. The choice cutout has now moved up $20 from recent lows just under $300. 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. The futures were higher with gains in cash and boxes.
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 917# up 4# from prior week and 31# 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 flat at 81.80%. This was 3% 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.
The story of the cutout has been the strength in the grind. The 90% grind has dominated the value of the cutout, joined by good demand for the 81% and the 50%. Over half of all beef sold is from the grind. The reduction in the cow slaughter has provided a foundation for this strength, but as the season’s change, the grind is seen as toppy and has declined in all of the blends.
The Cutout. The cutout posted more gains, helping and encouraging larger slaughter numbers at the beef plants. The choice/select spread is half of last year’s number.
A longer term trend is developing the relationship between choice and select cuts. Cheaper feed and high replacement costs has encouraged cattle owners to feed cattle longer. The result has been a consistent improvement in quality grade in the nation’s beef plants. The percent of cattle grading choice or better has been rising 2-4% over last year narrowing the choice/select spread in the carcass cutout. The spread has hovered at half of last year’s spread.
Replacement markets
Cash prices for replacement cattle have remained stubbornly strong. Receipts at major markets are well under last year pressuring cash prices higher. The cash market has shown some sharp divisions with weaned calves gaining ground on unweaned calves and premium program cattle suffering losses. Yearlings are now gaining ground in price after falling below last year. Cattle movements will be increasing during the next month as many cattle move off of summer grass into the feedyard and many calves are weaned and headed for winter grazing locations, but the numbers are all smaller.
Summer gains across the high plains on native grass is often difficult to predict. Many factors impact daily rate of gains on yearlings or calves and moisture is only one. Conditions can be too wet and, if rains never stop all season, the grass becomes washy and gains are often disappointing. Warm dry periods to the naked eye appear to harm the grass and make it brown, but they can produce the correct maturing process and record optimum gains. Preliminary results this year are indicating an excellent year for gains on native grass and cattle moving to the feedyard are generally heavier than usual.
The percentage of new crop calves that are weaned increases each year. Producers have discovered that weaning in place delivers more value to the producer than accepting the discount at the marketplace. Because a large amount of calves come from small herds, some breeders are not equiped with labor or facilities to carry on weaning support systems. Prices are sufficiently high that many just want to cash in the calves and move on. Likely to develop soon will be new vaccines making weaning easier and less stressful to the animals.
The drought monitor continues to favor herd expansion but the rains never fall evenly across all regions. This time of year it is important to receive additional rain to further progress for wheat grazing. The plains has been specially dry the past two weeks and some early planted grain fields will require more moisture. More light cattle will be placed in feedyards this year with lower feed cost and sometimes feedlot gain cost will differ little from grazing cost on wheat fields.
Feeder Cattle Futures. Feeder contracts were higher.
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. Grains were firm in overnight trading Sunday. Harvest is proceeding in full force with many areas with the southern plains mostly completed. Measurement of crop yields will begin to be estimated by private sources. Corn basis levels in Guymon, Oklahoma are at $.90 — basis the December contract.
CONSUMER SIGNALS TRICKLE DOWN
The end of the beef pipeline is the consumer and changes in behavior and purchasing habits at the meat counter and in restaurants often feeds all the way through the supply chain. Some changes are subtle, and others pronounced as buying decisions dictate production changes. Sometimes those changes are only in price points and other times production practices change.
One change, rooted in labeling, has been the transition away from Brands returning to commodity products because of price. Marketing experts tried to attract consumers to some popular trends in diet or heath using labeling as the draw. Included in this group were “natural” and “grass fed” labels and other labels that included only a Brand name on a commodity product. If a product serves the purpose of attracting a consumer, who might otherwise not purchase beef, then it is useful, otherwise unnecessary.
Inflation has been a driver in forcing changes in the selection of beef cuts. Consumers faced with tight household budgets have downgraded their purchases. First many have downgraded their quality grades from prime to high choice and in some cases to select. Next, they have changed preferences for the cuts leaving ground beef as the “go to” product. This has forced more end meats into the grind.
The changes in the live sector are mainly price points. The choice/select spread has narrowed this year and at times has been half of last year, although it widened this past week as we approach the holidays. Cattle owners relying on quality grade premiums in the beef plant have been disappointed. New replacement cattle purchases are lowering the forecast for grid premiums and passing along those in the form of lower relative bids for high quality cattle. Dairy/beef cross animals that are known for high grading have lost some of their price luster.
Buyers of premium quality cattle requiring premium prices will need confidence that the premiums paid on the front end will be returned at the end. The loss of some quality premiums at the beef plants will force more attention on cattle condition and live performance when executing purchases. Beef’s competitive position against pork and poultry will often rely on price and the consumer will hold the cards on price.
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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