December 6, 2021
THE CATTLE REPORT
CATTLE MARKET REPORT AND ANALYSIS
Show list size is an important component of the supply chain status. There is surfacing some evidence packers are whittling away at front end supplies. This will need to be confirmed with carcass weight analysis. Cattle performance is good with mild weather so even if the weights fail to drop the number of available cattle could be in decline.
This past week concluded with stronger prices and another large slaughter volume. The positive aspect of the large slaughter volume was the reversal of box prices that had been drifting lower but closed higher on Friday following the posting of the large weekly slaughter. This week will be another full slaughter week but is unlikely to match the volumes of the past week.
The mild and unseasonable weather has provided a perfect background for cattle performance that has been excellent in all regions. It would be unusual to finish the year without a winter storm but these are unusual times.
Light trade concluded the week with all cash prices $2-3 higher. Sales in Texas and Kansas were mainly $141-2 with a few cattle in Nebraska bringing $142.50. Iowa lagged the other regions by $2 with most sales at $139-140. Dressed sales were mainly at $220 in the north.
Cattle Futures. The status of the cash market continues to tug on the futures — pulling them higher despite skeptics wary of coronavirus mutants. Cattle futures remained deeply discounted to the cash prices.
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 3# at 895#. This is 2# under last year. The combined steer and heifer weights can easily be influenced when the proportion of steers to heifers in the weekly slaughter changes. Quality grade grading up 1.3% to 81.3%.
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. Sometimes the forward contracts are associated with forward sales of beef and sometimes not. Packers may simply try to add an extra margin for taking the price risk off the hands of the producer.
The Cutout. The box prices reversed course and turned higher as holiday demand kicks in. The defining characteristic of the current market is the decline in processing margins. The weak cutout market combined with sharply higher cattle input cost, smaller drop credits, and increasing labor costs, will narrow rather than squeeze the processing margins that remain over $250/head — historically an outsized profit margin for any beef processing operation.
We are nearing the end of the year and analysts are putting together year end numbers for the national cattle inventory. Many are forecasting a 1-2 million head drop in cow numbers. There is little doubt the national herd is in liquidation mode and cycling lower. The year to date numbers have cow slaughter running 10% over last year and should the trend continue through year end, the year end inventory of cows might be expected to fall 1-2%. The irony is this is occurring amidst an increase in global demand for beef.
Beef Feature Activity Index. Holiday features will not choose one meat as winner and will vary from store to store. Middle meats will continue to be popular so long as consumers are flush with government handouts. Standing rib roast have for many become the choice for the holidays while at the wholesale level, their price has been volatile.
The replacement markets between Thanksgiving and year end are not extremely active in the country. Movements slow, hedge margins are challenging, and attention of buyers and sellers turns to holiday events. This has resulted in more sellers of feeder cattle opting to send cattle to auction barns rather than accept the poor basis trades offered by feedyard buyers. The squeeze on feeding margins is expected to continue through year end.
Grow yards will be active this winter as shortages of grazing force many calves into conditioning yards. Feedlots normally discount grow yard cattle because of flesh and resulting performance deficiencies. Grow yards will find high feeding cost will hamper growing expense and cost of gains will often equal the purchase cost of un-weaned calves. There are fewer roughage products with good values for growing cattle.
Oklahoma City. — Good demand and large receipts sent cash prices for all classes of cattle higher.
OKC West — The special calf sale feature many lots of value added calves and prices were generally $10 higher with active demand.
Feeder Cattle Futures. Feeder futures were lower in an attempt to correct the imbalance between grain and replacement cost feeding into a future breakeven number. Replacement prices have outrun the futures prices for next spring for fed cattle.
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 higher late week. Traders will be watching for signs that farmers are marketing this year’s grain crop for delivery after the new year. Guymon Oklahoma basis is 100 over the March contract.
THE BIG PICTURE
Fundamental and technical traders are often quick to discount the views of Big Picture traders who place bets across broad swaths of commodities with little analysis to individual commodity fundamentals. This is a mistake. While there are never assurances that macro-economic bets will be right, if they are based on valid assumptions and if those assumptions developed, the market direction favored by the position, would prove a winner.
The impact of coronavirus strains and out of control viruses pose a read and predictable threat both to our health and the global economy. We are in uncharted territory and the uncertain response of many health officials to the latest mutant should concern all humans on the planet. They simply don’t know the ramifications.
The fundamentals in the trade remain positive with the appearance of improving leverage for the cattle owners. Beef demand remains healthy and despite sky high prices, beef is moving in the stores. Bottlenecks in port transportation are clearing and export demand is staying intact. Processors have stabilized labor problems mainly with wage concessions.
There remain obstacles to clean sailing. Carcass weights now are little changed from prior year, so the packers have not run out of cattle supplies. There are serious threats to beef demand from sky high prices in the stores and restaurants. Demand destruction caused by high prices is scary.
Beef producers can welcome a return to profitability and live in the moment. Over analysis can frequently confuse and obstruct the appreciation of a return to a rightful balance between sectors operating in beef production.
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.
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.