September 19, 2024
THE MARKETS
Packers are interested in improving their margins with lower prices and cattle owners want higher prices — so what new? The spread of bid/ask is wide with sellers in the south asking $185 and bids of $179. Packers are more likely to become active in the cash markets in advance of a COF report tomorrow. A few cattle sold in Iowa on Monday at $183-$184 — steady with last week. Overall show lists are down with both Nebraska and Kansas down, and Texas up. Slaughter this week is expected to remain above 600,000.
The Fed announced a half point drop in the fed funds rate that determines interest rates. Lower gas prices accompanied by lower interest rates will go a long way helping the family budgets. It also will help drive down operating cost for beef producers and many other businesses across the country.
Cattle on feed numbers on September 1 are the low point for the year as the fall run begins and cattle off summer grass are placed into the nation’s feedyards. Many cattle will find their way onto pastures after weaning before being placed on feed in the spring but moisture and temperatures will determine the amount of winter grazing. The pool of replacement cattle will continue to decline.
The past month has improved margins at the beef plant and improving margins brings larger slaughter volumes — a healthy development. This past week’s slaughter was a surprising 620,000 up 76,000 over the holiday shortened week but down 11,000 head from last year. The fed cattle portion of the weekly slaughter continues to make a larger percentage of the total slaughter than prior years with cow slaughter of both dairy and beef cows in decline. The cow slaughter remains well under last year. Beef production, however, continues strong in the face of smaller numbers because of heavier carcass weights.
PRE-RELEASE COF REPORT
On Feed Sep 1…………… 100.7% range 100.1%‐101.3%
Placed on Feed in Aug.. 98.5% range.. 93.5%‐102.3%
Marketed in Aug…………. 96.5% range.. 96.0%‐97.5%
Cattle Futures. The spot market lost .50 with small gains in the back months. The weekly slaughter rates will be positive for cash markets requiring more slaughter inventory.
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 913# up 5# from prior week and 33# 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 down .8% at 82.60%. This was 3% over last year.
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.
The story of the marketing for beef cuts has been the grind. The 90% grind has dominated the value of the cutout propelled by the reduction in the cow slaughter. More of the end meats have gone into the grind as consumers downgrade their beef cut buys.
The Cutout. Box prices were lower. Seasonally box prices reach a low in September then rally into year end. Exports have been especially strong considering the price of our beef. Assisting the demand from abroad has been the declining value of the dollar as interest rates are expected to move lower.
A longer term trend is developing the relationship between choice and select cuts. Cheaper feed and high replacement costs has encouraged cattle owners to feed cattle longer. The result has been a consistent improvement in quality grade in the nation’s beef plants. The percent of cattle grading choice or better has been rising 2-4% over last year narrowing the choice/select spread in the carcass cutout. The spread has hovered at half of last year’s spread.
Replacement markets
The first major price realignment of late summer is in full progress as buyers try to back away from the high prices in the replacement market. The optimism that was present in the deferred feeder cattle futures contracts is all gone and the deferred contracts are now indicating lower prices in the future months with prices well under current cash. Despite the decline in prices forecast for the future, many operators are filling current needs and foregoing operating margins.
September is the beginning of the fall months that frequently deliver headaches to purchasers of unweaned calves. The spread between weaned calves and unweaned calves always seems too wide but as many have experienced, the spread in pricing may not be wide enough. Temperature up in the 80s or 90s during the day are soon replaced by 50s at night and those temperature changes encourage respiratory disease in unweaned calves. The choice between a 525# unweaned steer at $260 vs. a weaned steer of the same weight at $310 is a lot. The promise of miracle drugs never seems to materialize.
The drought monitor continues to favor herd expansion but the rains never fall evenly across all regions. This time of year it is important to the wheat belt to receive rains in preparation for planting winter grain crops. Wheat grazing is always a factor and availability will help temper and determine the level of feedyard placements. More light cattle will be placed in feedyards this year with lower feed cost and sometimes feedlot gain cost will differ little from grazing cost on wheat fields.
Compared to last week: Feeder steers and steer calves 3.00-8.00 higher. Feeder heifers 2.00-5.00 higher. Heifer calves 3.00-8.00 higher. Demand good. Quality average with a few fancy drafts. The market is holding together very nicely despite the heat and dry conditions through out much of Oklahoma. Supply included: 100% Feeder Cattle (59% Steers, 38% Heifers, 4% Bulls). Feeder cattle supply over 600 lbs was 68%
Compared to last week: Steer and heifer calves that were weaned sold fully steady to 4.00 higher. Demand remains good despite the heat and lack of moisture. Supply included: 100% Feeder Cattle (56% Steers, 40% Heifers, 4% Bulls). Feeder cattle supply over 600 lbs was 43%
Feeder Cattle Futures. Feeder contracts were lower.
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. Grain prices seemed to have found a ceiling. Harvest yields continue to rise and the latest Wasde report raised the estimate to 183.5 bushels for a 15.5 billion bushel crop. Harvest is beginning on the south plains. Storage of last year’s crop is being emptied from bins to make room for what appears to be a bumper crop. Corn basis levels in Guymon, Oklahoma are at $1.00 — basis the December contract.
THE GAMES PEOPLE PLAY
The purpose of price reporting is to inform the beef producing community of daily transactions as they occur to provide information and transparency to the marketplace. Private sources began the practice, but most had no authority to enforce rules, or they had a market perspective that was presenting a bias in their reporting. Congress turned the task over to USDA and gave them the authority to enforce the rules and publish the results. The result is Mandatory Price Reporting.
Over the years the way and manner cattle change hands has changed. Today most cattle are sold either on a formula or grid depending on carcass results to render the final price. This requires a base live price at the feedyard, and that base is adjusted for carcass results. The pool of cash cattle determining that price has shrunk requiring adjustments to making it meaningful to the industry.
The processors have developed creative ways to game the system using glitches in the rules. USDA being an overworked government bureaucracy has been slow to respond to some of these efforts although they have attempted to update their reports. At the top of the list are “over the top” sales that currently are misapplied to the formula bucket of prices. These are cattle sold at XX dollars over the reported cash sales and this price is set on Monday after the weekly cash prices are compiled. USDA has the ability to force these sales into cash sales before the Monday wrapup is released but has not. Other sales are negotiated as a delivered price to the plant preventing their grouping into the FOB cash live trades on which most grid bases are based. Generous flat beef bids also pull cattle out of the cash pool. This past week flat beef prices were $4-6 higher while live cash was only up $1 at best.
Correcting these reporting flaws requires changes to Mandatory Price reporting. The changes need to be adjusted regularly as they develop because as soon as new rules are on the books, newer efforts to subvert them will occur. Government agencies have never been known as agile, but most are people interested in fair and accurate reporting.
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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