March 29, 2024

THE MARKETS

Cattle owners in the north were not ready to concede the dollars taken off the futures contracts on cash sales this week. The spread between north and south widened this week In the north live sales were $188-$190 with dressed sales $298-$300. In the south most cattle traded for $186 after a small volume earlier in the week at $185.

This week’s USDA report dropping corn acres by 5 million acres has rallied the corn futures but we are a couple months away from more definitive information on corn acres. The questions raised by the report were centered on where the 5 million acres went because there was no rise in soybean acres. Usually the farm acres trade between corn and soybeans and to some extent cotton the south. Feeding operations in the southern plains will find choices between wheat and corn as wheat is pricing into many of the rations.

This week marks Week 6 of a near or sub 600,000 head slaughter volumes. The week was flat with the previous week at 598,000 down 3,000 from the previous week. The slaughter was 29,000 under last year. Processors margins continued to struggle for margins with higher cash and modest gains in box prices.

Cattle Futures. Futures posted a positive day to close the week. Futures are closed today for Good Friday but yesterday’s gains were far short of retracing losses from early week.

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 883# down 3# from prior week and 16# 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 up .6% at 85.30%.

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.

The stable of beef production is the grind and much of the grind is produced from cows. Most of beef is sold as grind and the flucuations in price are smaller and the cuts cheaper than many other beef cuts. It becomes a barometer for beef pricing and then during certain times of the year the more expensive cuts like middle meats gain or lose popularily causing fluctuations in the composite cutout.

The Cutout. Box prices stabilized in late week trading. Traders will watch for signs of improvement in the middle meats as we push forward into spring and temperatures warm and cookouts increase.

Replacement markets

A major adjustment in the pricing of replacement cattle will hang in the balance as operators absorb the sell off in futures prices and competition heats up for replacement cattle from a shrunk pool of spring offerings. Short supplies seemed to be the driver for price until this week’s price reversal in the futures market that has taken the feeder futures dollars lower. The conflict will squeeze margins for all operators in the live sector.

One notable statistic is the decline currently being reported in feedlot arrival weights. Recent placements are averaging 50# under last year. This is driven by cheaper feed and competition from the feedlot for production pounds that now are frequently cheaper in the feedlot than outside on pasture. One implication of lighter placement weights will be longer durations in the feedlot to reach target weights. Already dairy cross placements have slowed feedlot turnover.

Market observers will begin to look for signs of a reduction in heifer placements on feed. This will signal the beginning of the herd rebuilding. Heifer retention also will reduce the calf pool available for grazing and growing. Conditions are now right for the rapid rebuilding of the nation’s cattle herd. The ommission of a breakdown by sex in the monthly COF reports by USDA is an oversight in need of correction.

Oklahoma City. —

Compared to last week: Feeder steers 3.00-6.00 lower. Feeder heifers 4.00-8.00 lower. Steers calves steady to 5.00 lower. Heifer calves steady to 2.00 lower. Demand moderate to good. Quality mostly average. it appears some of the grass buyers have pulled out of the market as some of the tight 7 weight steers and 6 weight heifers that would normally go to grass are selling sharply lower. Supply included: 100%
Feeder Cattle (56% Steers, 42% Heifers, 2% Bulls). Feeder cattle supply over 600 lbs was 60%.

OKC West  —

Compared to last week: Steer and heifer calves sold 5.00-10.00 lower. Demand moderate. The CME Live and Feeder Cattle contracts on the CME closed sharply lower. Supply included: 100% Feeder Cattle (50% Steers, 40% Heifers, 10% Bulls). Feeder cattle supply over 600 lbs was 16%.

Feeder Cattle Futures. Futures rebounded for small gains following the recent decline.

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 moved sharply higher as the USDA report pulled almost 5 million acres from the projected corn plantings for this spring. This leaves corn acres slightly over 90 million acres. This will divert more feedlot rations from corn to wheat. Continued interaction between the two grains will increase the corn carryover and reduce the summer basis for corn. Corn basis offerings in Guymon, Oklahoma are at $1.20 — basis the May contract.

SUPPLY STATUS AT THE FEEDLOTS

Assessing the status of fed supplies is never an easy task and this year has surprised many observers and market participants with the resiliency of the market at a time when the high placement numbers from last fall should be heading to market. The processors, struggling for a margin at the beef plants, have pared back the slaughter hoping to stimulate demand and back up feedlot supplies. This strategy thus far has been unsuccessful and has left many wondering why..

Some clarity is now becoming apparent and like most complex problems, the answer can be found at the margins, where small changes in operations can impact the leverage that exists between cattle owners and processors. The big four packers control over 80% of the market but that leaves 20% for the independents. Small actions by those independents can influence the market and tip the leverage between buyers and sellers.

Many of the independent beef slaughter plants are flex plants able to slaughter both cows and fed cattle. These operations manage the slaughter by seasonal changes and adjustments depending on the availability of killer cows. It is no secret that the beef cow herd is declining, and the beef cow slaughter has been in decline all this year. Now the beef cow numbers are joined by a decline in dairy cattle leaving the plants little option but to switch to the always available fed cattle market for kill slots.

This phenomenon is obvious looking at the graph of prices for the 90% lean beef that has jumped this year. More of the end meats will go into the grind to service the ground beef market and beef imports will shoot upwards. This pressure from the independents keeps the big 4 packers from backing up prices on fed cattle offerings as both struggle with margins and compete for available fed supplies.

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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