June 14, 2024

THE MARKETS

Currently futures prices do not dictate the level or direction of cash prices. That may change but yesterday’s falling futures prices and a unusually large attractive basis, failed to distract cattle owners from the objective selling cattle higher. While both Texas and Kansas sold a few cattle at $186 — $1 higher, the proving ground was in the north where prices were $3-6 higher. Live trades in the north were mainly $193 to $195 with an outside top of $197 in Iowa. Dressed prices ranged from $303-$305 with some reaching $307.

It is difficult to see the spread between the northern and southern plains maintain an almost $10 difference in pricing. Freight and quality differences don’t justify that type spread. Especially Kansas is positioned to take advantage of the overheated competitive market in Nebraska. Futures prices also will at some point adjust to current cash and not remain heavily discounted to the cash.

This past week’s slaughter at 614,000 was up 74,000 from the previous holiday shortened week and down 3,000 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 a steep decline.

Cattle Futures. Futures prices fell for much of the morning yesterday before responding to the higher cash trade by closing with triple digit gains. The most active August contract has lacked support and even with today’s gains still falls $15 under cash with only shorter numbers of cattle to be offered this summer. The June contract continues selling at a steep discount with only days left in the month. Basis levels are unusually large for this time of year.

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 888# down 6# from prior week and 34# 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 2.1% at 82.00%.

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. Choice prices firmed late week just as everyone thought they were headed south. The middle cuts are showing strength into Father’s day. Purchasing for Father’s day, that is mostly concluded, will give some families a reprieve from tiring poultry dishes.

Replacement markets

Feedlots are finding little relief from high priced feeders. May placement numbers are flat with prior year. The competition for feeder cattle will remain intense all summer. The decision of whether to buy a presumed loser and gamble on future prices or leave the pens empty is the question before many feedyard operators. Some remember 2015 when price expectations on overpriced feeders fell short and losses of $500/head were common. Somehow popular opinions always tend to find this time different.

The wait for a retention of heifers for breeding purposes is upon us. Action at auction barns as well as country private treaty sales are featuring an emphasis on heifer purchases. The rains across much of the plains has jump started the rush for replacement breeder heifers. Cattle brokers are finding customers more interested in finding breeding stock rather than stocker replacements. With crop prices in decline, some farmers will opt for livestock. The implications will be felt in the coming months as feedlot heifer placements decline.

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 Texas Panhandle 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: Feeder Steers over 850 lbs 1.00-6.00 higher. Feeder steers under 850 lbs 2.00-7.00 lower. Steer calves 5.00-10.00 higher. Feeder heifers steady to 4.00 higher. Heifer calves 4.00-9.00 lower. Demand moderate to good. Feeder cattle futures up over 3.00 today. The market was up and down all day. Some northern buyers were not here today leaving some holes in the market. Supply included:
100% Feeder Cattle (54% Steers, 45% Heifers, 1% Bulls). Feeder cattle supply over 600 lbs was 76%.

OKC West  —

Compared to last week: Seers and heifer calves sold steady on very limited comparable offerings. Demand good. Supply included: 100% Feeder Cattle (38% Steers, 57% Heifers, 5% Bulls). Feeder cattle supply over 600 lbs was 26%

Feeder Cattle Futures. The feeder contracts were lower.

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 prices flattened. Planting is almost complete. Good rains in the corn belt are setting the stage for favorable growning conditions. Basis levels are firming. Corn basis offerings in Guymon, Oklahoma are at $1.50 — basis the July contract.

THE ELUSIVE $2 THRESHOLD

Last year the CME board came within ticks of reaching $200 in futures trading. There is nothing magical about the $2 threshold – after all, it is just one cent above $199. There is something psychologically that occurs in our minds when prices reach certain benchmarks. It remains to be seen whether we will cross the $2 threshold, or not, and many factors will feed into the determination.

The least important and totally meaningless reason for prices to reach $2 is the need of cattle operators to achieve that level to profit on cattle on feed. Prices have never responded to the profitability needs of the participants as any observer can verify. Prices will respond to economic factors at work in the marketplace. Markets can punish the neediest participants and often do.

More relevant is “by the numbers”. $2 by the numbers certainly seems achievable. Cow slaughter continues to decline. Feedyard placements are on track for reductions as we move forward, and total domestic beef production is expected to decline over the next couple of years despite rising carcass weights. Processors will be competing for smaller pools of fed cattle and competition should force prices higher.

Feeding into the supply side will be imports and exports of beef. Imports will be increasing, and exports are likely to decrease. The value of our dollar will be an important factor determining the flows in and out of the US markets, but there is likely to be some net gain of non-domestic supplies entering our market.

Demand is the elephant in the room. Forecasts for the economy will rely somewhat on the outcome of the Presidential election. Employment levels have been high, and those levels will need to hold for household budgets to include high priced beef in the grocery bag. Interest rates and inflation will move forward hand in hand to determine the burden they place on consumer’s preferences at the meat counter.

Rebuilding will happen faster than many forecasts predict, but the interim remains a testing ground for many unknowns. Testing the elasticity of the demand curve for beef is always complex and, knowing the various econometric models are all likely to be wrong, is no reason to halt the analysis.  

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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