October 1, 2023
A major commodity sell off occurred Friday with all livestock, grains and oil prices in sharp decline. This follows a topsy turvy pattern of the past two week pitting the two schools of price direction against each other.
Business is mostly concluded for the week with some evidence packers are content to pay steady prices despite falling futures. Live sales are primarly $184 in the north with spots of $185 Friday – $1 lower. Live sales in the south were steady at $183, with spots up to $184 Friday — leaving the declining spread between the two regions at a recent narrow $1. Dressed sales were mainly $290-$291 – $1-2 lower with a few at $292 Friday.
The last quarter of this year will seasonally raise expectations for the middle meats to support the boxed beef market as we move closer to holidays. This year might be an occasion for consumers to choose a high priced beef option. Most eaters soon tire of chicken.
The slaughter this past week was 612,000 down 13,000 head from the previous week. The slaughter reduction this week from last year was a whopping 55,000 head. The year on year reductions in slaughter are reflective of the decline in the nation’s cattle herd – both cows and fed cattle. The cow slaughter will increase during the final quarter of this year but remain under last year. Heifer retention has yet to occur in the herd build up.
Cattle Futures. Futures plummeted to finish the week. Most contracts lost $1-2 dollars Friday in an extremely wild week of ups and downs.
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 881# up 4# from prior week and 2# under 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 .4% at 78.2%.
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 and packer basis bids fail to provide sellers a profit margin for feeding. The decline of forward contracts pushes more cattle into the cash market where they are sold either as grid or negotiated prices. Not all of these cattle find their way into mandatory price reporting. Nevertheless, more cattle in the spot markets will provide more liquidity to the cash markets. The spread between futures and proforma break-even prices has made it difficult for packers to negotiate forward contracts.
The Cutout. Box prices are showing some signs of finding a floor as slaughter volumes decline. The next two weeks are expected to feature pared back slaughter numbers.
Beef Feature Activity Index. The activity within the beef cuts has been as important as the interplay between the meats. Both pork and chicken are hitting highs for this year in pricing. Ground beef prices at the end of August were at a record high for this year while the middle meats decline. Consumers appear not ready to give up on beef but shop down to lower cuts. The premium program beef offerings are also currently losing favor with the consumer.
Weather is cooling as we move into October — the largest placement of cattle on feed for the year. Hot dry weather at the end of the summer has driven placements to the feedyard in September and year over year will post one of the few months over last year. This will not signal a reversal of cattle on feed numbers as we finish the year and expect lower placements from October through December.
Gains on the plains have been good and early season drought turned wet to give ranchers beneficial forage for the balance of the grazing season. Winter grazing prospects are also improving with many farms busy planting wheat for winter grazing. Stocker operators will be challenged with nosebleed levels of prices on light calves for grazing. Hanging in the background is the prospect for a severe winter in the southern plains. While northern feeding locations suffered last winter the last few winters have been mild in the southern plains.
Pasture insurance rates on cattle are on the rise ignoring inflationary pressures. The increases are two-fold. The value of animals this year compared to last is significantly higher. Losses from flooded feedlots earlier this year caused losses to the underwriters. While the odds of a harsh winter in the south may not have increased with El Nino’s arrival, the probability of storm damage this winter is perceived to be larger.
The spread between weaned and unweaned calves is beginning to widen. Many operators are aware of the health risks present in unweaned calves this time of year and representations by sellers sometimes are misleading. A 30-40 day weaned calf sometimes means very little. Even longer weaned periods sometimes come with risks. The variances between daytime highs and nighttime lows can create dangerous pathogens in the animals.
Compared to last week: Feeder steers steady to 2.00 lower. Feeder heifers 2.00-4.00 lower. Demand moderate to good for feeder cattle. Steer calves 4.00-8.00 lower, except under 450 lbs mostly steady. Heifer calves 10.00-15.00 lower. Un-weaned calves up to 20.00 lower. Demand moderate for calves. Quality mostly average. The calendar says fall but temps remain hot and humid. Many farmers busy in the field planting fall crops. Supply included: 100% Feeder Cattle (51% Steers, 43% Heifers, 6% Bulls). Feeder cattle supply over 600 lbs was 54%.
OKC West —
Compared to last week: Feeder steers sold steady. Feeder heifers traded 1.00-3.00 lower. Demand moderate to good for feeders. Steer and heifer calves sold 3.00-6.00 lower, few trades of reputation and/or thinner fleshed cattle sold steady. Demand moderate for calves. Farmers are in full swing for drilling wheat. Quality mostly plain to average, few attractive. Supply included: 100% Feeder Cattle (61% Steers, 37% Heifers, 2% Bulls). Feeder cattle supply over 600 lbs was 75%
Feeder Cattle Futures. Feeder futures suffered triple digit losses.
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 ground higher this week. The focus in the coming weeks will be evaluation of the national yield on corn and potential damage from the hot dry weather of the past couple months. Basis levels are feeling the pressures from rising fuel costs. Corn offerings in Guymon, Oklahoma are at $1.00 for November/December corn — basis the December contract. This basis level remains half last year’s $2.00 level. Premiums for the deferred contracts have widened with the rise in interest rates.
NOTES FROM ALL OVER
Oil prices hit another high this week on the pathway to $100. President Biden announced 6 months ago the release of millions of barrels of oil from our country’s strategic reserve in an effort to control inflation. Oil was trading at $70 and he assured the public he would replace those barrels if prices ever dropped to $67. Not once but three times oil fell below $67 once hitting $63/barrel. Guess what. No oil was ever purchased to restore the critically important strategic reserve.
BATTLE ROYALE FOR PRICE DIRECTION
Those owning cattle are coming to terms with a new reality. The trajectory of cattle prices may not be on track to continue the upward spiral until heifers are held back from the feedlot and the herd expansion has begun. Those having purchased cattle at a price level requiring $200 and higher to return their investment, may go home next year with a loss.
Many had become comfortable expecting a soft landing for the economy. This expectation is once again looking shaky. The federal debt is racking up increases unheard of in our financial history and servicing that debt with rising interest rates will create a burden left to solve by future generation of Americans. Workers in many sectors of the economy are finding monthly budgets won’t stretch and labor strikes in airlines, autoworkers, heath care, screen writers, and others are threatening the survival of many businesses. Small businesses with non-union employees are finding each new employee requiring larger pay and benefits than the last and doing less work.
The surprisingly large hog inventory report released last week provided evidence that the competition in the meat case will be intense with retailers featuring more pork, chicken, and seafood at the expense of beef. Beef’s market share must necessarily go down, but the selling price will determine each sector’s share of the beef dollar. Packers and retailers will be forced to live with smaller or non-existent margins on beef and beef producers will be left to bargain for the remainder.
The recent rise in the value of the dollar has contributed to a roadblock for our beef exports as beef becomes more expensive and foreign beef cheaper to import. The balance of trade has supported 10-20% of the fed cattle production but price can and will influence the volumes. Fortunately, the quality of our fed beef is hard to replace for many of the foreign buyers.
Rationing declining beef supplies is the job of the marketplace. Hot dry weather has interrupted the declining flow of placements into feedyards and September placements are expected well over last year. While year over year increases in placements will not continue, it will fuel bearish momentum in the short term. In the longer term, cattle numbers will continue to decline, and prices are unlikely to have found their top this year, but the notion the price rise will continue uninterrupted is flawed. The forecast for futuere price of cattle seeks the impossible union of a pyschological analysis of the consumer with the fundamental prediction of declining numbers of cattle.
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.
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