Ag Center Cattle Market Report & Analysis



September 11, 2019


PLAINS MARKET TALK



Cash Cattle.



China can report erroneous numbers of dead pigs from African Swine Fever and misstate the inventories, but they can't create pigs where there are none and that simple fact is playing out in the daily lives of the Chinese where pork prices have jumped 50% over last year. This has created a uproar from consumers and caused the government to release frozen pork from emergency stocks in an effort to ease prices but now those options are insufficient and now government officials are calling for urgent measures to address the problem. Vice Premier Hu Chunhua called the situation "much grimmer than previously reported" and promised immediate steps to increase supplies.



The South China Morning Post, a Chinese news outlet, reported yesterday the Chinese were prepared to offer to purchase American ag products as a precursor to the upcoming trade meetings in Washington next month. Because this is not a tweet from our President, the markets reacted to the news pushing all ag products sharply higher. The markets have been more cautious when reacting to President Trump's tweets and the follow through has been absent with no purchases announced.



The attention on trade news halted earlier light sales at $97 to await additional information on the China news. Cattle owners had already lowered the price expectation bar this week but now this is under review. Carcass weights for last week failed to increase.



The role of formula cattle is designed to undermine the markets in periods like this. These are cattle committed to a plant on a weekly basis but determining how many cattle to designate is left to the committed feedyard. Normally those intentions are solidified on Monday of each week for the next week. If the basis is extremely positive as it is currently, those numbers will rise and firms will pull forward on cattle. If they pull forward too much, it will harm quality grade and carcass yield. Unfortunately, those left in the cash market find more slots dedicated to the formula cattle and must compete for the few remaining slots by lowering their prices.



Motivated by enormous margins with some estimating almost $500/head, packers will keep the petal to the metal. There are limits to what many of the aging plants can do and maintenance is a necessary part of every plant's ongoing requirements. There have been a few glitches in beef plants since the ramp up period following the fire and it is reasonable to expect a few more. Keeping plant morale high is also important and plant managers are playing an important role with the labor force. Government meat inspectors also are seeing their schedules change -- not always to their liking.



Cattle Futures. Futures were sharply higher Tuesday as new reports of China entering our ag markets turned around a pessimistic tone in the futures market. Traders are known to be wary and no one wants to be caught short the market with the trade news coming out of China and the possibility of immediate action.



The Comprehensive Fed Cattle Weekly Report offers the most current carcass weight information. Steers and heifers are grouped together. The latest report shows carcass weights flat at 862# -- par with last week and under last year. This number will be closely watched as the industry adjusts to the loss of one plant. This increase is before the plant shut down.



Forward Cattle Contracts: As one might expect, there was little forward contracting during the distress in the market prices.



Weekly graphs on the Comprehensive Weekly Fed Cattle Report break down the categories of trade for the week according to 1) formula cattle; 2) negotiated live; 3) negotiated dressed; 4) and forward contracts. Some cattle included in the formula category are week to week negotiated grids and not committed cattle to one plant. Other cattle designated as formula are "over the tops".



The Cutout. Prices continue to decline but remain well above last year and pre-fire levels. Grading continues to decline pressuring select cuts. The choice/select spread expanded to $25.



Beef Feature Activity Index. The recent price decline in pork products has encourage more pork specials in the stores. This may change with developing news out of China.



Cutout Values as of Tuesday, September 10, 2019

Choice Cutout Choice Price Change
225.38 Down $1.57
Select Cutout Select Price Change
200.98 Down $0.94
Choice/Select Spread
24.40



Replacement markets



The pace of offerings of stocker and feeder cattle will be increasing during the next two months -- October and November. Yearling cattle will be plentiful and heavy. Buyers will be rethinking the price structure as pessimism rules on the future expectations for beef prices. The slowdown in placements for the past several months will create better leverage for next year for cattle feeders, but that seems a long way away.



Feedlots are backing away from the market and sharply lowering bids. Marketing of yearlings are expected to experience bunching this fall as many operators have held inventory rather than sell into a marketplace with prices well under last year. All indications are the size of the national herd has peaked and depending on economic conditions of the operators in beef production, the next move in the cycle may be liquidation. Cow slaughter continues above last year.



Buyers will be looking for calves to condition for winter grazing but will be hammering on prices as the entire price structure is threatened. Some wheat is being planted and rains and moderating temperatures are in the forecast and a reminder of fall a coming. Preconditioning calves puts animal health on the front burner. The wide spread between nighttime lows and daytimes highs makes for troubling heath issues.



Oklahoma City. Several pressure points converged on the replacement market this week and the result was sharply lower prices. Crashing fed markets, dry weather, and increasing supplies of cattle sent the prices $4-10 lower.



Feeder Cattle Futures. Feeder contracts reversed course and moved higher in sympathy with live cattle.



Feeder Cattle Cash Index. The index reflects the interplay between cash and futures. Cash for now is well over futures. This will encourage many buyers to wait until next month for purchases.



Forward cattle contracting. Feedlots are attempting to purchase replacement cattle discount to the futures and having little luck.



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



Grain Futures. Corn prices moved higher in early week trading as news about smaller yields surfaced and the potential for China reentering our ag markets. Losses for last week are close to 15 cents. The corn basis is currently at 60 over the September board in Guymon, Oklahoma. Corn is now pricing into rations at $7.50 cwt. in the Oklahoma Panhandle.


LESSONS LEARNED



In the early days of marketing fed cattle, most feedyards would occasionally have a pen of cattle that would fail to attract bids from packer buyers calling on the yard. After repeated attempts to extract a bid and failing, the cattle owners reached a point of desperation and inquired of the packers how they might get rid of the pen of undesirable cattle. Packers, always wanting to be helpful, would check with the head buyer and then propose a solution. The cattle owner would be granted a kill slot, in spite of the fact the plant really didn't want the cattle, and the packer would give the seller "the best prices they could" on a grade and yield basis. Those sellers having the opportunity to try this type of arrangement quickly learned the high risk of G&Y selling that became known as "Grade and Steal".



Today's marketing in the cash market has the same feeling as grade and yield sales of 50 years ago. Cattle owners are panicking as they attempt to find kill slots. Realigning cattle flows and negotiating arrangements with the processors is proving to be a challenge. The packers are quick to remind sellers they are covered up with cattle and unsure about when they can work the cattle into a slot. Discussions proceed and accommodations are arranged but price concessions are required as part of the trade. Sellers are reminded of previous bids passed and this leads to confusion and panic on the sell side amid red ink that already has sellers unsettled.




Tyson has announced, as reported by Reuters, the full plant operations will not be open until the first of next year. They will be necessarily careful not to announce a deadline they can't meet. Finishing out the year in this type environment will test the resilience of producers. Already close outs are reporting losses of $150-250/head, and it may get worse before it gets better. Equity is leaving the industry and the Tyson fire simply piled on another stressor to an already stressed live sector facing lost markets because of the Chinese trade wars, and competition from alternative protein products that are grabbing market share.



There was a day when there were large variances in processing capabilities of the different companies operating beef plants. The more efficient companies stood ready to expand their market share with new plants as soon as circumstances allowed. Today most plants in this country are 50 years old and no one company holds a competitive advantage over the other firms. This creates an environment in which no one desires to upset the gravy train and each firm is satisfied to stay the course with their current market share and not challenge the competition by building a new plant.



This leaves producers in an untenable situation with all margins in the beef business captured by one segment of the beef pipeline. The short-term reaction by cattle feeders will be pushback on the stocker operators and breeders. Feedlots are margin operators in the middle of beef production. Longer term solutions require either new beef plants or a much smaller beef cattle herd.


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 1,007.25 134.30
Cost of Gain 600 pounds 432.09 0.72
Estimated Interest(Prime + 1%) 39.22
Current Breakeven 1,471.10 108.97
Current Futures 1,469.21 108.83
Net Profit / Loss -1.90 -0.14
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 1,102.50 147.00
Cost of Gain 600 pounds 515.45 0.86
Estimated Interest(Prime + 1%) 36.33
Resulting Breakeven 1,654.28 122.54
Current Texas Panhandle Cash 1,349.46 99.96
Net Profit / Loss -304.82 -22.58




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