January 15, 2022

THE CATTLE REPORT

CATTLE MARKET REPORT AND ANALYSIS

Cash Cattle

With a pared back slaughter volume, sales for this past week again will be light. Packers can be very selective and some of this week’s slaughter ready cattle will be carried over. In the north live prices are mainly $137-138 and dressed trades at $218 – two dollars lower than last week. Sales in the south were mostly at $135-137. Kansas is developing as the weakest fed market in all the regions.

The weekly slaughter is 621,000 head, only 1,000 above last week but remains 31,000 under last year. It is becoming obvious the capacity is sufficient but the worker pool is not.

The first signs of winter brought frigid temperatures and snow to the northeast missing many of the feeding areas. Iowa and Minnesota were hit with snow but other areas of the plains endured cold and wind.

Cattle Futures. Futures prices posted triple digit gains as many sense a low in fed prices this past week and a recovery next week both in slaughter volumes and 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 flat at 900#. Weights have moved above prior year and are currently 5# over 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 83.5%.

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. Box prices continued higher at week’s end. Retailers are reporting short supplies of several grocery items and this only aggravates the condition and more consumers hoard goods.

The annual all cattle inventory will be released this month. We are certain the national herd is destined to be in decline probably by as many as 1 million beef cows. As the year ended, drought areas in the west are finding some relief in the form of rain and snow but new areas of drought in the Panhandle of Texas and Southwest Kansas are developing.

Beef Feature Activity Index. The new year will continue pushing consumer towards home meals and this should be positive for beef consumption. Colder weather will push some sales away from more expensive middle meats and towards the end cuts that are often good for roasts. Looming in the background is the threat that high prices of beef have impacted demand.

Replacement markets

The replacement markets has been surprisingly strong especially for light calves. The January 1 cattle inventory is expected to show another drop in supplies of replacement cattle destined for the feedyards. Pens, emptied during the holiday season, were creating demand for replacements and the available supply of cattle was inadequate — keeping competition keen for replacement cattle. Basis levels improved to one of the best levels of recent weeks. Those positive developments may find headwinds as high feed costs and a faltering fed cattle market feed over to the replacement markets.

Placement patterns may be altered by dry conditions in much of the plains. Weather will dictate cattle movements and winter moisture in the northwest and mid-west has brought much needed relief. The Texas and Oklahoma Panhandles remain extremely dry. With the higher wheat prices, farmers will want to remove grazing cattle earlier in the season to improve wheat yields.

Oklahoma City. — Prices were mixed for feeder cattle with continuing strong demand for calves. Dry conditions in much of the plains is not discouraging buyers who

OKC West  — Yearlings are higher except the heavy weights. Weaned calves continue in strong demand despite dry weather and failing fed prices.

Feeder Cattle Futures. Feeder futures were lower. The large premiums built into the deferred contracts are propping up the calf market.

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 back towards towards the $6/bushel mark. The USDA’s World Agricultural Supply and Demand Estimates (WASDE) report was released. U.S. corn stocks-to-use increased to 10.4 percent on increased harvested acres. A 75-million-bushel increase in corn used for ethanol was offset by the same decrease in exports. Meanwhile the basis is weakening. Guymon Oklahoma basis is $1.00 over the March contract. 

IS PROCESSING BOTTLENECK PERMANENT?

The list of reasons for the beef processing industry’s inability to process the available market ready cattle is a long one. Plant closings, mechanical problems, fires, cyberattacks, weather, and most importantly labor woes, all have contributed to the problem. The result has been the lack of participation by the live sector in the oversized margins in the beef supply chain.

The situation since the beginning of the New Year has differed very little from the previous bottlenecks and has dashed once again expectations for balanced trade leverage between the feedlots and the packing plants. Once again, we are seeing box prices shoot higher, while fed prices move lower. Retailers will be forced to raise prices on the beef counter making beef a focus point for the battle against inflation. There also will be some beef products that are out of stock and result in a lost sale. These conditions force consumer decisions that threaten destruction of beef demand.

The easiest scapegoat is the Coronavirus and its latest mutation Omicron. Unfortunately, the problem is more troubling. The current strain appears, although highly transmissible, not particularly threatening to the health of those who have been properly vaccinated — as most plant workers have.

The core of the problem is an insufficient worker pool in the beef plants. The generous handouts of the Biden administration have given many plant workers an opportunity to look around in a hot labor market and find other jobs. Wages in the beef plants have gone up but they need more to attract additional workers to the labor pool. The work is hard and the pay needs to properly reflect the contribution the workers have made to the current $500/head margins for moving beef into and out of the plant in a few days.

The difficulty of the current situation is the unpredictability of attendance. Once a few plant workers make a no show or are out of the lineup for any reason, the jobs within a plant have to be reassigned to make up for the missing people. This requires cross training and last minute decisions about how to cover for the missing workers. The logistics of reassigning work on the fly requires slowing the chain and watching a shift fall short of the slaughter target.

The current plants can process today’s fed cattle supplies but it requires a larger labor pool. It takes time to recruit and re-locate the new workers and more time to train them in their jobs. As some of the virus benefit programs are phased out more people in the potential labor pool will seek jobs. It is doubtful we will see slaughter numbers pop back to 670,000 but hopefully we have seen the low and will witness progress in the coming weeks. Cattle producers have missed out on the rewards of two years of unparalleled demand for beef both domestically and for export.

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.

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