May 4, 2024
THE MARKETS
The week closed with quite a few unsold cattle and only light volumes at $184 in the south. Trading continued in moderate volumes at $186-$187 in the north and $295-6 dressed — both a dollar higher. This week has witnessed a true bifurcation of the cash markets and the futures markets with strong cash fundamentals overpowering weak futures.
The large decline in cow slaughter this year has notched a permanent dent in the weekly slaughter. This week’s slaughter at 619,000 was up 6,000 head from previous week and down 1,000 head from last year. The fed cattle portion of the weekly slaughter is up however as cow slaughter continues well under last year. Processor’s margins continued to struggle with market moves in cash and beef insufficient to restore positive returns at the plant.
Cattle Futures. Futures in the deferred contracts moved modestly higher. June is the spot month and is trading dollars below 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 at 885# down 5# from prior week and 27# 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 1.5% at 83.90%.
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.
Consumers are losing interest in premium beef products on the shelf at most supermarkets. The Never/Never antibiotic and hormone free high priced cuts are finding more difficulty in movement off the shelf. This in turn has forced mark downs for many of these products and threatened already thin margins. Wagu highly marbled steaks are also disappearing as consumers back away from luxury cuts.
The Cutout. Choice box prices reversed course and traded higher to close the week.
Replacement markets
Feedlots are finding little relief from high priced feeders. Feedlots are pushing to fill empty pens as April placements fall dramatically from prior year. The competition for feeder cattle heats up and breakevens rise dollars above the fall CME live cattle contracts. The decision of whether to buy a known loser or leave the pens empty is the question before many feedyard operators.
The relationship between cattle cost and grain cost is due to change after a week of rising grain prices. Both wheat and corn have staged material rallies this week and each increase will add dollars to the future breakevens of cattle placed on feed now. Moisture is favorable in the corn belt where most of the corn is grown but acres are uncertain and will be better defined in the coming month. It is still a long way from harvest of this year’s crop.
Market observers will begin to look for signs of a reduction in heifer placements on feed, but this most recent COF report indicated the reduction in heifer placements has yet to occur. Heifers on feed were at 4.5 million head indicating little or no reduction from last year. The reduction will likely occur during the second half of this year and this will be disruptive to Cattle on Feed numbers. Obviously, there will be more steers on feed compared to heifers and those steers will be fed longer. This in turn will reduce turnover and mean less heads for slaughter slots. Heifer retention also will reduce the calf pool available for grazing and growing. Conditions are now right for the rapid rebuilding of the nation’s cattle herd.
Compared to last week: Steers over 800lbs steady to 2.00 higher. Steers under 800lbs 3.00-6.00 higher. Heifers over 800lbs 3.00-6.00 higher. Heifers under 800lbs steady to 3.00 higher. Demand good. Quality average. Supply included: 100% Feeder Cattle (63% Steers, 36% Heifers, 1% Bulls). Feeder cattle supply over 600 lbs was 86%
OKC West —
Compared to last week: Steer and heifer calves were to lightly tested for a trend but a lower undertone was noted. Demand moderate. Quality plain to average. Supply included: 100% Feeder Cattle (57% Steers, 43% Heifers). Feeder cattle supply over 600 lbs was 20%
Feeder Cattle Futures. The feeder contracts were mixed to close the week.
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. Corn was flat to close the week but wheat prices jumped higher on Friday. Planting is almost 30% complete. Good rains in the corn belt are setting the stage for favorable plantings. Corn basis offerings in Guymon, Oklahoma are at $1.40 — basis the July contract.
PREPARING FOR THE UNEXPECTED
Mad Cow disease was well known in the EU but no one suspected it would be found in our herds in the U.S.. When some BSE cows were found and the news broke, the markets went into panic mode and futures were down limit for many days in a row. It turned out the industry had done very little to prepare for the eventuality of a mad cow and when it happened, there was panic and poor responses.
Health officials are framing protocols for interstate transportation of dairy cows. Testing is continuing for HPAI and as of now, no cases have been reported in beef cows, but there has been little testing and little preparation for a response if beef cows do test positive. There also has been no positive test of the virus in beef, but again testing will continue and there is little preparation for reactions if the virus is found in beef.
We all have witnessed the immediate response in the markets to HPAI news stories. The reaction time is quick, and the markets have proven extremely sensitive to the stories. This should not be surprising and over time nothing moves markets more than health scares, especially if those health scares involve the food we eat every day. The problem is many of the stories are sensationalized and often miss getting the facts right.
The time is now, before the fact, for information gathering and strategic planning of responses to events that may never happen. The industry should investigate potential vaccinations for all cattle. NCBA should eat crow and announce support for mandatory animal identification so health officials can limit the damage from the spread of the disease. And finally, the scientific community should advise us on the best recommendations for food preparation for consumers eating beef that comes from animals that may carry the virus.
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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