June 6, 2023
CATTLE MARKET REPORT AND ANALYSIS
If you assume the late week prices in the south hold at least steady ($180-$182) as do the northern cattle at $190, this leaves the June LC contract $4-5 under the southern cash and $13 under northern prices. It is hard to imagine shorts in the contract willing to extend the suffering. There remain 16,000 open interest contracts in the June contract as the contract winds down this month.
Show lists are larger in the south with the historically large positive basis in a delivery month. Texas and Kansas led the lists higher with Nebraska and Colorado unable to muster more cattle to offer. Asking prices in all areas were higher. There were no reported trades in any region as buyers and sellers wait for bid/ask spreads to develop. Buyers will be purchasing for a full slaughter week and box prices are attempting to play catch up to the rise in cash prices.
The slaughter this past week was 573,000 down 52,000 head from the previous week due to the holiday shortened week and down 35,000 from last year. Next week will be a full slaughter week. Cow slaughter has fallen and will likely continue to decline in the face of generous rains in previously droughted out areas of the country. Packers will attempt to fill the void with fed cattle that continue to be in short supply.
Cattle Futures. Futures were higher weighted to the front end that continues to lag the cash market. Short sellers are slowing taking their punishment as the futures continue to lag the cash.
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 857# up 1# from prior week and 2# lower 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 .4% 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 fail to provide sellers a profit margin for feeding. This will provide more liquidity to the cash markets as packers are pushed into the spot market for more of their weekly slaughter needs. The spread between futures and proforma break-even prices has made it difficult for packers to negotiate forward contracts.
The Cutout. The small slaughter numbers combined with stubborn processors, forced box prices sharply higher in early week trading. Processing margins are failing to compensate for sharply higher fed cattle input prices.
Beef Feature Activity Index. Despite the gap between pork and beef prices, beef features in the store pull in customers who tire of pork and chicken. Consumers have proven resilient in their demand for beef in the diet. Pricing of the various cuts in the carcass mix are undergoing a change as well as the popularity of beef luxury items such as prime beef and Wagyu. Retailers will continually change pricing to achieve a marketing balance that moves each cut at a timely pace reminded of the fact beeves come in all the cuts.
All feeding operations will be nervous about supplies of replacement cattle for summer. May placements might exceed prior year, but with recent rains, the movement of two way weight cattle will be to pasture and not the feedyard. Some steers just short of 700# in Oklahoma bringing $235 were sent to grass. This will increase pressures for acquiring summer placements from small pools of available feeder cattle. The feeder cattle index that has been lagging the futures got a jump start and rose $8 in one day to reach $216 with August feeder futures at $242.
Widespread rains across much of the southern plains is stimulating the already nosebleed price levels for stocker calves. Unstocked pastures are filling with light and mid weight stocker cattle. Grazing will pull many replacement cattle away from grow yards and feedyards. Many heifers will be held for breeding — further diminishing the supply of feeder cattle available for feedlot placement. Many middle weight cattle weighing in the 600-700# range will now move to pastures. This will further shorten the already scarce supply of yearlings for feedlot placement during summer months.
Oklahoma City. — Feeder cattle were $8-15 higher. Calves were $5 higher.
OKC West —
Feeder Cattle Futures. Futures prices were higher as corn prices turned lower. The progression of the cash feeder cattle index that started the month barely over $200 moves to close with the August feeder cattle contract currently trading north of $242.
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 were lower with prices moving to the tune of the latest weather forecast. This is a critical time for crop development and the national estimate of 181 bushel yields could be at risk with dry weather. Spot basis offerings in Guymon, Oklahoma are lower at $1.45 for corn basis the July contract.
ARE FUTURES LESS RELEVANT?
In agriculture production mode, managing price risk has always been important. The earliest futures contracts on the Chicago Board of Trade allowed farmers to forward price their crops taking some of the price risk away. The introduction of trading in futures contracts shifted price risk for producers to either industry users of the ag products or speculators willing to attempt to outguess the markets.
Today the futures are all traded electronically but the premise is the same, but the ag commodities have been overwhelmed by the financial futures where interest rate futures dominate the volume of transactions on the exchanges. Some ag commodities like corn remain extremely liquid totally dictating the price of corn in the country with all cash transactions basis the futures.
Cattle contracts have been less fortunate with attempts to upgrade the contracts to cash settled contracts unsuccessful. Very few fed cattle in the country trade basis the futures. The futures tend to gravitate to the lowest common denominator of the cash trade making the relevance for price setting problematic. Today futures are the “also ran” in the industry as prices on futures follow the cash and rarely lead to price discovery.
The declining value of futures for the industry prevents innovation of new contracts that are necessary to manage risk. Useful for many in the industry would be contracts for every month of the year. This won’t happen with a delivery contract because long speculators refuse to enter the spot month for fear of a delivery. The retail beef trade badly needs a futures contract in dressed beef or cuts to manage risk associated with marketing beef and is currently forced to use the live cattle contract that poorly corelates to the boxed beef prices.
The seductive value of option trading in cattle futures is offset by the difficulty of moving between illiquid options contracts and associated live contracts. Bid/Ask spreads on year forward contracts in cattle and options are almost non-existent costing buyers and sellers large pricing penalties. Spread positions are now responsible for much of the volume in all contracts.
Instead of the industry redesigning the contracts to cash settle, they constantly tweak an obsolete delivery function that compels inhumane treatment of the cattle and exposes all deliveries to needless costs. The slow and steady decline in relevancy will someday cause a wake up call and in the meantime every player suffers small pricing losses.
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 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.