December 3, 2022

CATTLE MARKET REPORT AND ANALYSIS

THE MARKETS

Smaller show lists in a steadily declining fed supply chain will continue the pressure on cash prices as cattle owners leverage their newly found bargaining strength. In the south, live cattle sold for $155 while northern live sales were mainly $157-$159. Dressed sales were mostly $247-249 or $2-3 higher. Sales volumes were light for the week especially in the northern areas where some of the higher grading cattle refused to sell for less than $160.

This week’s large movement to the downside on grain pricing will go a long way to providing some relief to cattle feeders from high feed costs. Both the board price and the basis took a hit. Some feedyards were switching to wheat as hard winter wheat falls more rapidly than corn. Ration prices will begin to drop by year end. The decline also will tend to top out farm prices for this period of time. Higher interest rates and falling grain prices will put downward pressures on sky high land prices.

Slaughter volumes for this past week were 663,000 head — up 67,000 head from the previous week because of the holiday, but down 19,000 from the same week last year. Slaughter volumes are on the verge of contracting from year ago levels as supplies tighten. Both smaller volumes of fed cattle and cows will trigger slaughter declines that will be accompanied by squeezed margins at the beef plants.

Cattle Futures. The cattle futures firmed in week’s end trading. The spot December contract continues to trade $$$ discount to the cash. Few longs will expect to find delivery notices as hedged sellers capitalize on the positive basis levels.

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 up 2# at 896#. Weights are 3# over prior 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 up .7% at 81.1%.

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 cutout was weak to close the week. The spread between choice and select has moved erratically making a strong narrowing move last week followed by this week’s sharp widening — leaving the spread close to $30. Quality grade has played a large role in price for many cattle feeders in the past few months. Unusually wide spreads between prime/choice/select have rewarded high quality cattle with helpful premiums on the grid. The first quarter of the new year is seasonally the period when the choice select spread is the narrowest.

Beef Feature Activity Index. Post-Thanksgiving holiday choices often include higher priced beef cut like steaks and rib roasts. Price competition and supply will determine the role of beef in marketing plans for the balance of this year.

Replacement markets

Some feedlots will plan to enter the winter with less than full capacities. Weekly placements are showing year over year declines. Competing for replacement cattle may be tough now but will get tougher through the winter. Uneven grazing patterns and declining cattle numbers will provide the backdrop for smaller fed supplies well into the future. Increased emphasis on supply chain arrangements will continue throughout the industry. All beef producers downstream from the breeders will face a squeezed supply of cattle.

Closely watched grain fields across the southern plains have responded to recent rains and are now able to accept cattle for grazing. Timing is critical to the growth stage of the winter grain pastures. Some of the light cattle are coming out of grow yards and other stocker operations are purchasing cattle in local sale barns. Smaller receipts at all auctions are creating a perfect template for higher prices.

Oklahoma City. — Sharply smaller receipts lead to higher prices especially lighter weight calves.

OKC West  — Calves were sharply higher with some prices $10-15 higher.

Feeder Cattle Futures. Feeder futures moved higher as calf prices jumped and replacement prices expectations change to reflect the new cost of production.

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 fell as Congress took action to prevent a rail strike. Rail is a critical component of grain delivery across the nation and determines the basis. Exports impact the demand side. Current basis offerings in Guymon, Oklahoma is $1.90 over the December contract. Dealers are offering JFM corn at $2.00 over the March contract basis Guymon.

THE FINAL ARBITER

One certainty is the fact the futures prices posted at the close of any given day will not be the final prices realized at the termination of a specific monthly contract. They simply represent the consensus guess made by traders, with differing objectives and views of the final price. Each transaction posted on the exchange represents two opinions of the market direction – a long and a short. Some positions might be taking on price risk and some taking off price risk.

The current trading environment is dominated by the macro-traders betting on a recession and the attendant impact of declining commodity prices and rising un-employment. Many of these traders have never seen a steer and some are not aware of cattle herd liquidation cycles and our current position in that cycle. Their positions in cattle are often accompanied by associated shorts in the grains and metals. Their objective is a big picture bet, and the scope of the investment size is large.

This negative price environment has denied margin protection to many of the hedged feeding operations. Hedged cattle as a percentage of total numbers of cattle on feed is in decline. Many operators refuse to hedge a loss. This in time will change as equity losses force some unhedged cattle owners out of the market. So long as equity levels are high in the industry, people will overpay for feeder cattle.

The leadership of cash prices over futures is not limited to the live cattle contract. A mirror scenario is occurring in the feeder contract where feeder cattle prices are exceeding the spot feeder futures price/index. Feeder cattle that earlier this year were selling with deep discounts to a runaway futures market are now often premium.  Ultimately, supply/demand rules and sellers with a product in scarce supply will be able to dictate the price of the physical commodity.

The open and free marketplace will always be the final Arbiter of price. The macro traders can make their bets on the impact of a recession and the speculative longs can take the opposite position calculating on a sharply reduced supply of beef, but no one can accurately forecast how all these factors will balance out until the fat lady sings.

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.