PLAINS MARKET TALK

The weekly lagging carcass weight report reflected continuing increasing carcass weights casting some doubt on the current status of the fed cattle offering. If the $8 premium in the December contract over October simply pushed marketing numbers back, the December futures might be overpriced. Heavy rainfall across much of the southern plains all the way to Nebraska can have a impact on pen conditions and cattle performance.

Futures prices rallied as cash prices in the north began to be reported. A few sales in the north at $137-138.50 supported the notion that cash prices will improve this week. Iowa cash prices are sometimes a leading indicator each week because some light sales usually occur in Iowa each day of the week. Asking prices were from $140 in the north to $144 in the south.

Box prices may have slowed or ended the upward move and most trade will wait to see the size of this week's slaughter. Last week's revised 573,000 cattle returned to a number that is probably necessary to keep the fed supplies current. The problem with this week is the input cost rise of last week has taken away the processing margins. Packers need the operating profit to continue to maintain a slaughter number in the 575,000 head range. Boxed beef prices continued higher at mid week. This is some evidence of improving beef demand and of the responsiveness of the consumer to lower prices. The choice cut out was quoted at $217 and select at $210 leaving the spread at $7. 

Futures prices have jumped well ahead of cash prices. Earlier week sales at Oklahoma City were $5 higher prices for feeder cattle. Receipts were larger as the higher prices of the past two weeks have brought more cattle to town. Futures are a couple dollars premium to the index that will post the final for October next week. Buyers remain wary and there are some signs that some buyers are sitting on the sidelines. A 750# feeder steer was selling for $195 in the south.

Rains across a broad section of the southern plains will improve grazing conditions and demand for light calves. Most of the wheat is in the ground but waiting for moisture. Calf prices are moving higher following the trends in fed and feeder markets. Grazing rates are mostly at $4.50 cwt. or 45-50 cents on the gain.

Corn futures moved sideways this week. Corn remains in a trading range between $3.75 and $4.00 a bushel. The corn basis in Guymon, Oklahoma is currently quoted at +$.40 over the September contract. Corn is now pricing into rations at $7.40 cwt. in the Oklahoma Panhandle.

Cash vs. Futures

The relationship between cash cattle and the futures contracts determines the basis. The basis can be negative or positive and has both seasonal and regional differences. Understanding and forecasting those spreads is tricky but extremely important to cattle owners marketing cattle and to observers anticipating future market actions. It does not always follow the logic that many might impute to changing circumstances.

Most of last year cash cattle kept historically large premiums to the futures. The futures doubted cash cattle could or would sustain record breaking cash highs. This year the basis has been all over the board and currently cash cattle are selling at a par to the October board. Just a few trading sessions ago, cash cattle were selling $15 under the December futures and $5-7 under the spot October. This price action caused cattle feeders to change behavior in a numbers of ways. They took some cattle and tendered them for current delivery. They also recalculated out dates to carry as many cattle as possible into the December time frame. Many lighter weight fed cattle [1100-1200#] changed ownership and were weighed up and placed back on feed for harvest in the Nov-Dec marketing periods.

The realignment of marketing schedules also changed the relationship between October and December live cattle futures. The December during the first week of October was selling $8.50 premium to the October contract. It now is selling a little over $3 premium. It remains to be seen how this redeployment of cattle marketing plans will affect the cash markets. Closely watched will be the carcass weights to see if the heavy cattle of October are followed by more heavy cattle in the later marketing periods.

Related but not connected to live cattle futures are the basis moves on cash feeder cattle vs. feeder futures. The current feeder index is calculated by CME based on USDA market reports. It remains several dollars under the feeder futures where it will cash settle at expiration. The front months are selling premium to  cash prices but the deferred months are selling discount to current cash making it difficult to margin profits in winter grazing programs. Regional differences are important in the replacement market as corn prices directly impact prices cattle owners are will to pay for replacements.

There are valid and substantial complaints with the current cattle futures contracts. Deliveries to stockyards of fed cattle no longer make sense and was implemented and designed for a different era. The contract should be based on a YG3 Choice carcass and all deliveries made to the beef plants. The feeder index needs reformatting – a complex job full of controversy. Private treaty transactions need more testing for validity. Sometimes the committees established to review and suggest changes fail to initiate needed change.

FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE OUT TABLES

Readers have been sending notes regarding breakeven projections. One commenter ask how we could use 80 cents for a cost of gain when everyone knows that is too low. Another ask why we are using such a high cost of gain number. The two emails illustrate the difficulty of providing one benchmark for all regions of the country. Currently a typical bases in the corn belt might be $1 under the futures and alternatively a corn basis in Hereford, Texas might be $1 over the futures. The northern feeders have much cheaper grain and more expensive feeder cattle. A more meaningful report would include one breakeven and close out for each major region. It also is difficult maintaining the tables when both fed and replacement prices are changing in $5-10 cwt. price blocks.

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.