April 26, 2022
CATTLE MARKET REPORT AND ANALYSIS
APRIL 1 COF REPORT
U.S. CATTLE ON FEED ESTIMATES
IN YARDS WITH MORE THAN 1,000 CAPACITY
ACTUAL OF ESTIMATES OF ESTIMATES
CATTLE ON FEED April 102 100.3 99.5-100.9
PLACED DURING March 100 91.7 87.0-96.0
MARKETED DURING March 98 98.1 97.7-98.4
The April 1 COF report had elements of an April Fool joke with a placement surprise that confused many in the industry that track numbers. It is unusual for a monthly COF report to fall far outside of the pre-release estimates. Marketing numbers are straight forward taken from slaughter numbers. Placements are more complex, but analysts use several tools that gauge the placement number with surprising accuracy. The placement number at 100% of prior year was far beyond pre-release guesses of 91%. The heavy placements were in Kansas and Nebraska, but services tracking those numbers were skeptical of the USDA release. Futures prices accepted the numbers with a 300 point loss in many of the contracts.
Cattle owners at opposite ends of the plains sold cattle at steady prices. In Iowa, live sales were reported at $145 while on the southern end of the plains, Texas cattle owners sold cattle for $140 — both prices steady with last week. Little to no cattle sold in Kansas and Nebraska.
This past week’s slaughter at 665,000 head was par with last year. The weekly slaughter size will determine the current status of fed supplies. The beef production this week exceeded prior year because cattle were heavier than last year. As front end supplies shorten, heavier cattle will be required to satisfy the same beef production level. The period from now until Memorial Day could be a strong demand period for beef demand.
Cattle Futures. Cattle futures fell as traders reacted to Friday’s COF report. The expiring April contract closed under $140 and the soon to be spot month of June sold under $136 almost $10 under yesterday’s sales in Iowa.
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 2# at 875#. Weights are 14# over prior 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 fell .3% to 82.5%.
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. The driver in forward purchases of cattle will always be forward sales of beef. Packers will always be willing to take a price risks off the producers plate in return for an extra margin.
The Cutout. The cutout was mixed with choice cuts lower and select higher. This week will test the appetite for beef as spring demand should help stabilize prices. Beef in cold storage is well over last year and the high value of the dollar is pulling imports into the U.S. and making our exports more expensive.
Packer margins took a hit this past week as the cutout moved lower and cash cattle higher. The decline is not sufficient to cause cutbacks in the daily slaughter. Margins remain over $200/head.
Beef Feature Activity Index. Price competition will determine the role of beef in spring meat features. Consumer complaints about high prices can only be solved with larger volumes of beef cuts at more reasonable prices. The return of more normalized slaughter volumes and the rise in pork prices will favor beef features. Bird flu and high feed cost will keep pressures on chicken.
There are some signs that many cattle operations will buy cattle if they have an empty pen or open pasture at any price. The evidence of a large herd liquidation is substantial and weekly cow slaughter has confirmed the worst fears of trouble to come for beef production. Drought in large areas of the west will provide the final blow to numbers when rains return, and cattle operators begin to purchase and hold back heifers for breeding. The recent COF report shows scant evidence of a slow down in feedyard heifer placements. Recent prices paid for many feeder cattle ignore raging corn prices.
Price signals are telling stocker operators to wait to market cattle and market them at heavier weights. Holding cattle to market them later is not an easy task. Short availability of grazing means cattle must be supplemented with high priced feed. The sharp staircase upward in feeder futures promises large increases for replacement cattle in the future but many of those premiums evaporate with high feed costs.
Oklahoma City. — Yearlings were steady while calf prices jumped with moisture reports in the parts of the area. Bidding is competitive for smaller supplies of cattle despite falling futures.
OKC West —
Feeder Cattle Futures. Futures were lower as live cattle took a dive.
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 turned higher to open the week. Adding to the woes of high grain cost is an increasing basis level for many feeding areas. Combined these factors translate into sharply higher food cost for months to come. Guymon Oklahoma basis is $1.30 over the July contract.
CHANGING LANDSCAPE OF FEEDING CATTLE
There was a time during the heart of the Covid crisis when feedlots operating fully hedged operations received a windfall. Live cattle futures tanked – falling $20-30 cwt. based on fear of the unknown from the virus. For a while, feedlots were able to move cattle at what was easily all-time record-breaking premium basis levels with futures tanked and kill slots in short supply. That situation provided unexpected profit margins to fully hedged operations that are unlikely to ever be seen again.
Those times are in the rear-view mirror now. Excess feeding capacity accompanied by dwindling cattle supplies and surging grain have delivered an unsupportable fully hedged model. Breakevens or proforma estimates of future outcomes for currently purchased cattle are deep in the red often running $100-125 underwater. Sticking to the fully hedged model is problematic unless capital supplies are unlimited. Paying brokers to solicit feeding customers is also difficult when those customers are looking at the negative margins. Closing feedyards to re-open when margins change is also difficult and often impractical.
A simple solution is to stop overpaying for feeder cattle but simple is not always easy. The problem is the small feeder supplies and a buyer pool too large to control. Government handouts have left much of the industry flush with cash and those with plenty of cash will generally pay whatever cattle cost until the losses from doing so threaten their ability to operate. There also remain some operations that never hedge and simply rely on large capital reserves to absorb the ups and downs in the market.
The attraction of the fully hedged business model was small but reliable margins. During the Covid pandemic, interest rates were driven down by fed policy and small reliable returns attracted investments from pension funds, investment funds, hedge funds and others seeking the safety of fully hedged operations. Several of the large feeding companies are owned by those investment funds.
With the changing landscape for fed monetary policy pushing interest rates sharply higher, the runaway inflation threatening beef demand, and the dwindling cattle numbers, the stage is set for trouble in the cattle feeding sector. Navigating through these times forces some to attempt to outguess the markets – a difficult proposition in any time.
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.