WLI

Negotiated cash fed cattle trade continued to be light on Tuesday. The only established trend reported by AMS so far this week is mostly $180/cwt. on a dressed basis in the western Corn Belt. Although too few to trend, early live and dressed sales in Nebraska so far this week are at the top of last week’s range.

Cattle futures closed narrowly mixed Tuesday, amid sparse interest and direction.

Live Cattle futures closed from 30¢ lower to 22¢ higher, with open interest continuing to decline.

Except for 82¢ higher in spot May, Feeder Cattle futures closed an average of 39¢ lower, in light trade.

The most recent CME Feeder Cattle Index of $126.84 was the highest since the end of March.

Choice boxed beef cutout value was $5.48 lower Tuesday afternoon at $409.47/cwt. Select was $6.00 lower at $388.87.

Corn futures closed mostly 1¢ higher.

Soybean futures closed mostly 2¢ lower through Mar ’21 and then fractionally higher to 1¢ higher.

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Major U.S. financial indices closed lower Tuesday. Reportedly, pressure included a negative report about a potential COVID-19 vaccine, which helped lift stocks the previous day when initial test results were announced.

Investors also were assessing the latest economic projections from the Congressional Budget Office (CBO).

“After falling by 1.2% in the first quarter of 2020, real GDP is projected to contract even more sharply—by 11.2%—in the second quarter. At annual rates, those declines are equivalent to 4.8% and 37.7%, respectively,” according to the CBO’s Interim Economic Projections for 2020 and 2021. “Although the drop in output is acute, it has been partially blunted by past investments in information technologies (such as computers, software, and communications equipment), which have made it possible for a significant portion of economic activity to continue remotely. Before the pandemic began, almost 30% of workers reported that they could work from home…”

The report suggests the domestic economy will begin recovering during the second half of this year as concerns about the pandemic wane, state and local governments loosen stay-at-home orders, etc.

“The labor market is projected to materially improve after the third quarter; hiring will rebound and job losses will drop significantly as the degree of social distancing diminishes,” according to the report. “However, those improvements will not be large enough to make up for earlier losses. Compared with their values two years earlier, by the fourth quarter of 2021 real GDP is projected to be 1.6% lower, the unemployment rate 5.1 percentage points higher, and the employment-to-population ratio 4.8 percentage points lower. Inflation and interest rates on federal borrowing will remain relatively low because of subdued economic activity and weak labor market conditions through 2021.”

The Dow Jones Industrial Average closed 390 points lower. The S&P 500 closed 30 points lower. The NASDAQ closed 49 points lower.

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“It appears that the overall feed situation will be favorable and provide more flexibility for feeder and feedlot cattle operations,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his latest weekly market comments.

USDA projects corn production from the new crop at a record large 16 billion bu., in the latest World Agricultural Supply and Demand Estimates (WASDE). USDA projects ending stocks to be 1.2 billion bu. more than last year, which would be the most since 1987-88. The WASDE 2020-21 season average corn price forecast is $3.20/bu., the lowest since 2006-07.

Hay stocks on farms as of May 1 were also 5.52 million tons more (+37.03%) than the previous year at 20.43 million tons, according to the most recent USDA Crop Production report.

“The Livestock Marketing Information Center (LMIC) projects 2020 alfalfa hay production to increase 4.0%, resulting in larger ending stocks and season average prices down nearly 17% year over year to $150/ton,” Peel says. “Total other (non-alfalfa) hay production may decrease 1-2% in 2020 but a slight buildup of ending stocks is projected to push season average prices down fractionally to $132.50/ton…Regionally, the biggest concern is the Southeast with total May 1 hay stocks down 22.8% year over year (collectively) in Alabama, Georgia, Florida, North and South Carolina and Tennessee.” 

As always, drought could change the outlook.

“A large area of low-level drought is building in the west from western Kansas to northern California and the Pacific Northwest. Some of the worst drought areas are in Colorado and surrounding regions and in Oregon. Drought in south Texas has improved somewhat in recent weeks but some drought continues along the gulf coast from Texas to Florida,” Peel says. “This is a critical growth period and any expansion of drought conditions may have significant implications for pasture and hay production in the West.”

More specifically, according to the most recent U.S. Drought Monitor for the week ending May 12, Peel explains 17.42% of the country is in some level of drought (D1-D4). Another 16.89% of the country is abnormally dry (D0). So, 34.31% was abnormally dry or worse, compared to 30.78% a week earlier and 24.15% three months earlier.

Although too few to trend, early negotiated cash fed cattle prices on Monday continued at the higher levels paid in the north toward the end of last week. Live sales in Nebraska were at $119-$120/cwt. Dressed sales there and in the western Corn Belt were at $190.

Cattle futures closed higher Monday, extending the previous session’s minimal gains, helped along by continued cash price strength and significantly higher outside markets.

Live Cattle futures closed an average of 87¢ higher (25¢ higher to $1.72 higher in spot Jun).

Feeder Cattle futures closed an average of 94¢ higher (57¢ higher to $1.87 higher in spot May).

Wholesale beef values continued their expected, precipitous decline as packing capacity continues to expand ever so slowly.

Choice boxed beef cutout value was $19.37 lower Monday afternoon at $414.95/cwt. Select was $24.19 lower at $394.87.

Corn futures closed mainly fractionally mixed.

Soybean futures closed mostly 7¢ to 8¢ higher.

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Major U.S. financial indices closed sharply higher Monday, buoyed by promising early test results of a potential COVID-19 vaccine.

That was despite Federal Reserve Chair Jerome Powell’s sobering comments made to the U.S. Senate Committee on Banking, Housing, and Urban Affairs.

“Available economic data for the current quarter show a sharp drop in output and an equally sharp rise in unemployment. By these measures and many others, the scope and speed of this downturn are without modern precedent and are significantly worse than any recession since World War II,” Powell explained. “Since the pandemic arrived in force just two months ago, more than 20 million people have lost their jobs, reversing nearly 10 years of job gains. This precipitous drop in economic activity has caused a level of pain that is hard to capture in words, as lives are upended amid great uncertainty about the future. In addition to the economic disruptions, the virus has created tremendous strains in some essential financial markets and impaired the flow of credit in the economy.”

The Dow Jones Industrial Average closed 911 points higher. The S&P 500 closed 90 points higher. The NASDAQ closed 220 points higher.

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“The buildup in fed cattle supplies that are market ready is expected to have a substantial and lasting effect on fed cattle prices,” say analysts with USDA’s Economic Research Service (ERS). “Prices will remain low as the supply of market-ready cattle remains above the sector’s ability to process them, and the supply issue is expected to linger through 2021.”

Consequently, in the most recent monthly Livestock, Dairy and Poultry Outlook, ERS lowered this year’s average price forecast for fed steers (five-area direct) to $104.08/cwt.: $118.32 in the first quarter; $99 in the second and third quarters; $100 in the fourth quarter. The projected annual average price for next year is $109.

Keep in mind the forecast runs counter to current cash prices, which appear to be supported by packers’ willingness to give back some of their margins.

For perspective on packing capacity, ERS estimated 40% of U.S. packing capacity went by the wayside since Mar. 28, as plants struggled with COVID-19 infections and new safety precautions to protect workers.

“The current situation does not allow for plants to easily make up for lost slaughter capacity given workforce challenges,” say ERS analysts. “Based on recent maximum slaughter levels for the second quarter, there is likely a significant shortfall in slaughter since it peaked the last week of March. As a result, feedlots are having to continue to feed their cattle longer, and this is likely to be an issue into 2021 as the industry works through the feeder cattle that are awaiting placement in feedlots.”

ERS estimated there were 20.54 million head of cattle outside feedlots Apr. 1. That was 657,000 head more (+3.30%) than the same time a year earlier.

As the backlog of market-ready fed cattle continues to grow and feedlot margins are squeezed, ERS expects feeder cattle prices to remain under pressure.

“Based on recent price data, the second-quarter 2020 feeder steer price was lowered by $2 to $121/cwt. The third-quarter 2020 price forecast was lowered $5 to $123 and the fourth-quarter 2020 price was lowered $17 to $118,” say ERS analysts. “As a result, this month’s annual price forecast for 2020 was $124.50/cwt., close to last month’s forecast. The price forecast for first-quarter 2021 is expected to remain relatively low at $125. Feeder steer prices are expected to improve in the second half of 2021 on increased demand. The 2021 annual feeder steer price is forecast at $131.50, more than 5% higher than 2020.”

Although too few to trend, negotiated cash fed cattle prices bounced higher on Friday at $120/cwt. on a live basis in the Southern Plains and at $119-$120 in Nebraska. Also too few to trend, dressed prices in Nebraska were at $190.

The five-area direct weighted average steer price through Thursday was $11.36 higher than the previous week at $111.40/cwt. The average price in the beef was $19.90 higher at $179.30.

Cash price strength helped lift Cattle futures.

Live Cattle futures closed an average of 62¢ higher, (15¢ higher to $2.87 higher in spot Jun).

Feeder Cattle futures closed an average of 41¢ higher.

Choice boxed beef cutout value was $16.60 lower Friday afternoon at $434.32/cwt. Select was $18.34 lower at $419.06.

Corn futures closed mainly fractionally mixed.

Soybean futures closed 1¢ to 2¢ higher.

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Major U.S. financial indices closed higher Friday, after a volatile trading session, amid mixed economic data.

On the one hand, U.S. retail and food services sales plummeted 16.4% in April, compared to the previous month, according to the U.S. Census Bureau. Sales were 21.6% less than the previous April and worse than traders expected.

On the other, the closely watched Index of Consumer Sentiment from the University of Michigan edged higher month to month in May, up 2.6% to 73.7, but 26.3% below the previous year.

Pressure also included more political sabre rattling between the U.S. and China.

The Dow Jones Industrial Average closed 60 points higher. The S&P 500 closed 11 points higher. The NASDAQ closed 70 points higher.

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Beware kneejerk reactions.

That comes to mind as rhetoric grows for the government to mandate that beef packers buy a minimum percentage of their weekly needs in the spot cash market. Keep in mind that’s also equivalent to mandating that cattle feeders, collectively, sell a certain percentage of cattle in the cash market each week.

First, it was something called the 30-14 movement, advocating that packers be forced by the government to buy at least 30% in the cash market each week and that those cattle be delivered within 14 days.

Last week, Sen. Chuck Grassley (R-IA) and Sen. Jon Tester (D-MT) introduced a bill that would require packers buy at least 50% in the cash market each week, for delivery within 14 days.

Few would argue the value of deeper cash trade for the purposes of price discovery, especially in some regions, some weeks. Cash prices are rarely reported in Colorado, for instance, due to confidentiality rules attached to Livestock Mandatory Reporting (more later).

For perspective, over time, on average and nationally, figure 20-25% of all fed cattle trade in the spot cash market. Again, the percentage is miniscule in some regions some weeks.

Debate continues over just how much sustained cash trade in a particular region is required for effective price discovery. According to pioneering research conducted by Stephen Koontz, agricultural economist at Colorado State University a few years back–Price Discovery Research Project (PDRP)–the percentage varies by region.

The primary reason cash trade thinned over time is the increased use of what are termed alternative marketing arrangements (AMAs) for fed cattle. Think here of things like formulas and forward contracts.

In turn, there are several practical reasons more cattle feeders favored marketing more fed cattle via AMAs over time. Chiefly, it has to do with reducing transaction costs and the ability to differentiate cattle–and be rewarded or discounted–relative to specific packer demands. 

AMAs enabled the price incentives to differentiate beef products. In fact, some would say this ability to pull more beef through the system, more in line with consumer demand, was the cornerstone for turning the corner on consumer beef demand in the U.S. That was in about 1998. Before then, domestic consumer beef demand declined an average of 1% per year for two consecutive decades.

Add it all up, and Koontz says, “The use of forward contracts benefits those that use them $15 to $25 per animal. The use of formula arrangements benefits those that use them $25 to $40 per animal. Mandating the use of the negotiated cash market will have negative economic consequences commensurate with these amounts and to the extent of the mandate.”

That’s from a recent letter Koontz wrote to the National Cattlemen’s Beef Association (NCBA). He clarified his position and research after some in the pro-mandate movement tried using his research to defend their stance.

“My research does examine the impact of declining negotiated cash trade on price discovery in regional and national fed cattle markets. And, it also attempts to make recommendations as to the needed volumes of cash trade for minimal and robust price discovery. But, my work does not recommend, and I do not support,

a mandate of a given percentage cash trade,” Koontz says. “The main issue I have with the policy proposal is that it would cost the cattle and beef industry millions and possibly billions of dollars per year. This is known from research in which I participated.”

The research Koontz refers to is the aforementioned PDRP, as well as the congressionally mandated USDA-GIPSA Livestock and Meat Marketing Study (2007), which examines price discovery and AMAs. He was lead economist for that study.

Bottom line, Koontz says, there are many ways to increase the volume of cash trade and cash trade data without government mandates. He outlined some of those in his PDRP. Some state organizations are exploring these alternatives and variations of them.

“While the Texas Cattle Feeders Association (TCFA) believes and supports increasing price discovery through this greater volume of negotiated trade, we cannot support a government mandate,” explained Paul Defoor, TCFA chairman, in a recent letter to Congress. “Conversely, we are actively working to achieve a similar outcome through free market mechanisms.

“One such concept is a new marketing cooperative that puts small and large producers on equal footing to achieve the common goal of robust negotiated price discovery each week. Secondly, we have examined the viability of a ‘bid the grid’ concept on the transparent Fed Cattle Exchange Platform. Additionally, we are exploring options with an existing marketing cooperative that was created by TCFA in 2000, Consolidated Beef Producers, to increase negotiated trade.”

Likewise, Koontz explains some state associations are looking at ways to pay market makers for providing cash trade, which is a public good. Those who trade in the cash market enable price discovery. Those who trade cattle outside of the cash market benefit from the discovered cash prices–it’s typically the root of AMAs–but do nothing to help discover the price or reward those who do.

“Many asset markets do this (market makers),” Koontz says. “Industry participants work together to create and compensate a pool of cash market traders that are discovering price, are good at this service, and willing

to do it within their business model and for the benefit of the industry. It is one means to solve the public good problem of not enough quality price discovery. It would be less costly than a mandate and open to changes in how the industry does business in the future.”

Far as that goes, adjusting the rules of the Livestock Mandatory Reporting Act–up for reauthorization this fall–would provide more cash trade data. If interested, you can read the specifics of those guidelines below.

“Joint research by Kansas State and Iowa State Universities shows that expanding the reporting regions would reduce the incidence of non-reporting, due to confidentiality,” Koontz explains. “…many of our price reporting problems are due to the confidentiality requirements that were not part of the original act.”

“Any solution must not restrict an individual producer’s freedom to pursue marketing avenues that they determine best suit their business’ unique needs,” said Todd Wilkinson, in response to the bill introduced by Grassley and Tester. He ranches in South Dakota and serves as Policy Division Chair for NCBA.

“Government mandates, like that being proposed by Senator Grassley, would arbitrarily force many cattle producers to change the way they do business,” Wilkinson explained. “We will continue to work toward a more equitable solution and invite Senator Grassley, and other lawmakers interested in this conversation, to join us in the search for an industry-led solution based in free market principles.”

Cattle futures closed lower on Thursday for the second consecutive session.

Live Cattle futures closed an average of $1.51 lower, except for 25¢ higher in spot Jun,

Feeder Cattle futures closed an average of $1.77 lower.

Choice boxed beef cutout value was $15.07 lower Thursday afternoon at $450.92/cwt. Select was 16¢ higher at $437.40.

Corn futures closed fractionally lower across the front half of the board, and then mostly unchanged to fractionally higher.

Soybean futures closed mostly fractionally lower to 1¢ lower.

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Major U.S. financial indices closed higher Thursday, helped long by higher crude oil prices, and despite another 2.98 million initial jobless claims, according to the U.S. Labor Department.

The Dow Jones Industrial Average closed 377 points higher. The S&P 500 closed 32 points higher. The NASDAQ closed 80 points higher.

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Lingering tailwinds from government relief payments and the lifting of dine-in restrictions in states like Georgia, Florida, and Texas helped to improve U.S. restaurant chain transactions the week ending May 3, according to The NPD Group (NPD).

Total restaurant transactions were 26% less than a year earlier, compared to declines of 32% and 43% the previous two weeks. That’s from NPD’s CREST® Performance Alerts, which provides a rapid weekly view of chain-specific transactions and share trends for 70 quick service, fast casual, midscale, and casual dining chains.

More specifically, transactions at quick service restaurant chains were down 24% in the week ending May 3 versus a year earlier; they were down 30% the previous week. For the same two weeks, full service restaurants transactions declined 67% a 71%, respectively.

Restaurant dine-in restrictions were lifted for nearly 192,000 restaurant units or about 29% of all units since May 1, based on an analysis using NPD’s ReCount® restaurant census. Keep in mind that required social distancing limits can reduce dining room capacity by as much as 75% in some areas.

“Many restaurant operators have weighed the value of limited operations versus the cost of opening, health risks, or other factors, and chose to remain closed or continue with a takeout-only model,” says David Portalatin, NPD food industry advisor. “The most recent week’s performance suggests we’ve achieved about 30% of the potential volume in states where restrictions were lifted. Looking ahead to next week, another 46,000 restaurants could come back online.”

Negotiated cash fed cattle prices continued higher across a broad range Wednesday. Live sales in Nebraska were $15 higher than last week at $110/cwt. on a live basis and $20-$30 higher in the beef at $170-$180. Live sales in the western Corn Belt were mostly $12 higher than last week at mainly $115. Dressed trade was steady to $5 higher at $170-$185.

In the Southern Plains so far this week, live prices in Kansas are at $115, steady with the top of the previous week’s wide range. The price in the Texas Panhandle is at $110, compared to $95-$115 last week.

Similar gains were seen at Wednesday fed cattle auctions.

Choice steers and heifers sold $10 higher in the fat auction at Tama, IA, where 95 Ch 2-4 steers weighing an average of 1,466 lbs. brought an average price of $117.55/cwt.

At Sioux Falls in South Dakota, slaughter steers sold $17-$22 higher and fed heifers sold $10-$18 higher. There were 215 Ch 2-3 steers weighing an average of 1,446 lbs., bringing an average price of $111.78. “More packer buyers were present and willing to chase the market to get cattle bought after buying cattle in

the country at sharply higher prices on Monday and Tuesday,” according to the AMS reporter.

Cattle feeders also offered 4,601 head in the weekly Fed Cattle Exchange auction, selling 1,272 head for a weighted average price of $110. Money was the same on 450 head sold for delivery at 1-9 days and for 822 head sold for delivery at 1-17 days. Sold lots were from Texas and Nebraska.

Cattle futures continued the week’s volatile rollercoaster, though, giving back most of what was gained in the previous session.

Live Cattle futures closed an average of $2.24 lower (60¢ lower at the back to $3.30 lower in spot Jun).

Feeder Cattle futures closed an average of $2.49 lower.

Wholesale beef values declined sharply Wednesday, perhaps suggesting the Covid-skewed top is at least near.

Choice boxed beef cutout value was $9.40 lower Wednesday afternoon at $465.99/cwt. Select was $13.73 lower at $437.24

Grain futures lost some ground, with pressure from the previous day’s monthly World Agricultural Supply and Demand Estimates.

Corn futures closed mostly 3¢ lower through May ‘21, and then 1¢ lower to fractionally higher.

Soybean futures closed 11¢ to 13¢ lower through Jan ‘21 and then 5¢ to 7¢ lower.

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Major U.S. financial indices closed sharply lower Wednesday, for the second consecutive session. At least part of the pressure seemed to stem from remarks made by Federal Reserve Chair Jerome Powell, via webcast, to the Peterson Institute for International Economics. Investors were apparently hoping for a more optimistic outlook, relative to economic recovery, in the wake of COVID-19.

“While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks,” Powell said. “Economic forecasts are uncertain in the best of times, and today the virus raises a new set of questions: How quickly and sustainably will it be brought under control? Can new outbreaks be avoided as social-distancing measures lapse? How long will it take for confidence to return and normal spending to resume? And what will be the scope and timing of new therapies, testing, or a vaccine? The answers to these questions will go a long way toward setting the timing and pace of the economic recovery. Since the answers are currently unknowable, policies will need to be ready to address a range of possible outcomes.”

The Dow Jones Industrial Average closed 516 points lower. The S&P 500 closed 50 points lower. The NASDAQ closed 139 points lower.

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Although fed cattle prices continue lower than pre-COVID projections, forecast feed costs are also lower, providing some cow-calf producers with potential opportunity to retain ownership through the feedlot.

More specifically, analysts with the Livestock Marketing Information Center point out feedlot cost of gain is declining.

“As reported by the monthly Kansas State University survey (Focus on Feedlots), the average steer cost of gain for March was $83.41/cwt. Kansas feedlot projections for mid-April averaged $74, the lowest since August 2018. If grain and hay costs continue to slip, as expected, that number is headed even lower,” say LMIC analysts, in the latest Livestock Monitor.

Since February, the LMIC folks explain corn prices declined counter-seasonally. For the week ending May 8, they say prices in the Texas Triangle and Omaha were the lowest since late November of 2016.

For perspective, LMIC calculates the breakeven price for a steer placed in a Southern Plains feedlot and sold in April was $115-$117. For one placed in April and sold in September, breakeven is $97-$98.

The organization calculates monthly projected breakeven sale prices with feedstuff costs when a 750-lb. steer is placed, assuming typical feeding conditions (including weather) in a commercial Southern Plains feedlot. LMIC also calculates adjusted monthly breakevens based on changes in feedstuff costs.

“As this summer unfolds, producers running summer stockers and even cow-calf operations may want to carefully evaluate retained ownership,” says LMIC analysts. “Some pre-planning and attention to projected cost of gain may pay off.”