Ag Center Cattle Market Report & Analysis

Ag Center Cattle Market Report & Analysis

January 11, 2019

Cash Cattle.



There is almost no trade to date this week. Packers would buy some cattle steady but sellers are firm on higher asking prices. Most asking prices are $126-27 live and $200-202 dressed. Winter weather in the form of rain, snow and ice is crossing the northern plains. Packers will look at fewer fed cattle as we move forward and beef demand will determine how high fed prices can go this year. Last year prices topped in February at $130.



Packer margins are threatened for the first time in many weeks but margins remain satisfactory from a historical standard [$50/head]. Hog prices are jumping and the higher prices may be from China swine fever combined with easing trade tensions with China. Rising pork prices will benefit beef either directly or indirectly.



Slaughter volumes will be closer to 625,000 than pre holiday levels of 650,000. The government shutdown looms in the background with some USDA services unavailable. The longer the shutdown is left unresolved, the more people will notice the impact.



Cattle Futures. Futures are waiting for a signal from the cash markets and have traded in a very narrow trading range for the past two days. Traders anticipate steady to higher cash prices this week.



Carcass weights are released each Thursday [now discontinued because of the government shutdown] and are a closely watched barometer indicating the position of cattle feeders in the nation's feedlots. Carcass weights by the week are not being reported, as usual in the same locations, but supplementary information continues giving a good indication of the trends which are downward on weights.



The last report released for the week of December 8th, had steer carcass weights down 3# at 896# which 5# under last year. Heifers carcass weights are down 3# at 835# which is 11# under last year. Both numbers are well under two years ago.



Forward Cattle Contracts: Packer forward contracting is steady with most contracts of smaller numbers at $1 premium to the board except May where cattle can sell for $4-5 over June. April forwards were the largest volume of the new year at $1 over in the plains. Tight supplies and increasing slaughter capacity in the northwest continues to draw the largest basis premiums in the country. Packers pay enough to attract some Canadian cattle and common basis premiums are $3-6 over the board target months.



The weekly breakdown of fed cattle moving to the beef processing plants is as follows. 1) formulas 55%; 2) negotiated 20% [both live and flat dressed]; 3) forward contracts 25%. Some of the formula arrangements are week to week negotiated prices and not committed cattle to one plant.



The Cutout. Box prices are firming in late week trading. The choice/select spread will stay narrow during the next couple months.



The daily beef cutout price is an aggregate of all the primal cuts based on standard yields experienced by processors of each cut. USDA tracks prices of the individual cuts sold by the processors and compiles the daily cutout report. The yields of each primal measure the percent of red meat vs. fat [a lower value product]. As genetics have improved the red meat in the cutout has also improved. The new yields announced by USDA will add slightly more value to the cutout. This change is important and changes the value of the composite cutout reported by USDA but does not impact the bottom line for the beef processors.



The past year was a record year for quality grade. More cattle grading choice and prime has lowered the premium prime cattle have historically earned. Some prime beef is selling par with choice. The increase in grade is presenting marketing challenges to the processors.



Beef Feature Activity Index. The havoc in the financial markets has weakened the dollar and exports will be less expensive for our trading partners. China will remain a wildcard with a resolution of trade differences in the interest of both countries. Domestic demand should remain healthy with full employment and rising wages.



Cutout Values as of Thursday, January 10, 2019

Choice Cutout Choice Price Change
213.96 Up $0.12
Select Cutout Select Price Change
207.77 Up $1.30
Choice/Select Spread
6.19


Replacement markets



There will be a January 1 cattle inventory shedding light on the state of herd rebuilding. of course, it remains unclear if the report will be issued during the government shutdown. Most expect the growth to stall and 2019 supplies not to differ significantly from 2018. Larger supplies of light cattle moved to winter grazing locations giving the upcoming year a more even flow of feeder supplies into the nation's feedlots. December placements are estimated to be slightly larger than last year leaving on feed numbers January 1, 2019, 2% over last year.



Feedlot buyers moved back into the market with good demand for yearling cattle.



Oklahoma City. Prices opened the new year sharply higher with gains on steers from $2 to $7. Calves prices were weak as buyers shy away from heath problems caused by the recent rains.



Feeder futures. Feeder futures were flat with most months.



Feeder Cattle Cash Index. The index will now track the January contract to expiration. Futures are now pulling cash prices downward.



Forward cattle contracting. The basis bids that exist are $3-5 back for 800# spring steers delivered to the southern plains feedyards.



National Weekly Feeder Summary released on Friday of each week tracks the national prices by region for last week.



Grain Futures. Corn moved lower. The deferred contracts continue to price large premiums to carry. The carry premiums cause farmers to delay marketing plans but even out the basis offerings over the coming year. The basis is currently at 50 over the December board in Guymon, Oklahoma. Corn is now pricing into rations at $7.75 cwt. in the Oklahoma Panhandle.



BEEF DEMAND



Retailers, food service companies, and restaurants all make choices of meat offerings during the holidays. Those choices are driven by their perception of the interests of their customers. Often the choices are between promoting beef, pork or chicken. The economy is good, and beef has been a beneficiary of the targeted choice for meat promotions this holiday season. More specifically, the rib and loin cuts have found broad demand. Good clearance was noted among all beef sellers.



Exports reached the highest level in years in 2018 as the U.S. found increasing demand for quality, safe, American beef. Japan set to import records for American beef and Mexico re-established beef channels linked to our production. Korea continued to increase imports of our beef and smaller inroads were made with other trade partners.



No story of exports is complete without an analysis of our trade relationship with China. Since the beginning of the century, beef consumption has increased 67% in China but beef still represents only 10% of their meat consumption. A growing middle class is interested in more meat and more affluence means more beef. China has been a consumer of pork as the primary meat with pork consumption representing over 60% of all meat consumption. African Swine Fever is a real and expanding threat to pork supplies in China. Just this past week, the fever was found in one of the largest hog operations in China where 400,000 pigs are produced each year. The entire population of each contaminated farm will be eliminated to slow the spread of the disease.



As the virulent virus spreads and threatens more hog production, the question of how the meat will be replaced? More pork imports will be an option but also substitution of beef might fit nicely into the plan. Beef currently enters China mainly through Hong Kong and illegally through Viet Nam. Animal identification and trade negotiations could open the doors for beef to replace a lot of the lost pork production.



January has never been a good month for beef demand but less cattle are marketed during this period and with supplies running 2-3% above last year, prices might exceed last year. The impressive aspect of 2018 was the ability to sell more beef at higher prices. The overall challenge to beef producers and processors remains matching the right beef cut with the right beef customer at the right price - the single largest stimulus to demand.



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.

INPUTS TOTAL$ $CWT
750 # Feeder Steer 1,101.00 146.80
Cost of Gain 600 pounds 459.92 0.77
Estimated Interest(Prime + 1%) 42.66
Current Breakeven 1,595.63 118.20
Current Futures 1,587.33 117.58
Net Profit / Loss -8.30 -0.62
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.

INPUTS TOTAL$ $CWT
750 # Feeder Steer OKC 150 days ago 1,080.00 144.00
Cost of Gain 600 pounds 503.10 0.84
Estimated Interest(Prime + 1%) 35.57
Resulting Breakeven 1,618.67 119.90
Current Texas Panhandle Cash 1,659.56 122.93
Net Profit / Loss 40.89 3.03





wj