Cattle Current Daily—Jan. 2 and 3, 2023

Cattle Current Daily—Jan. 2 and 3, 2023

Negotiated cash fed cattle trade was light to moderate on moderate demand in the Southern Plains and Nebraska through Friday afternoon, according to the Agricultural Marketing Service. Trade was light on light to moderate demand in the western Corn Belt.

For the week, live prices were $1 higher in the Southern Plains at $157/cwt., $1-$2 higher in Nebraska at $158 and steady to $3 higher in the western Corn Belt at $157-$160. Dressed prices were $3 higher in Nebraska at $252. Dressed prices in the western Corn Belt the previous week were $248-$249.

Total estimated cattle slaughter last week was 547,000 head, which was 15,000 head fewer than the previous week but 23,000 head more than the same week a year earlier. Year-to-date total estimated cattle slaughter of 33.68 million head was 499,000 head more (+1.5%) than the same time last year. Year-to-date estimated beef production of 27.85 billion lbs. was 369.7 million lbs. more (+1.3%).

Choice boxed beef cutout value was $3.12 higher Friday afternoon at $281.98/cwt. Select was 23¢ higher at $250.93/cwt. Week to week on Friday, Choice was up $10.03.

Cattle futures sagged lower Friday amid a general lack of trader interest and year-end position squaring. 

Live Cattle futures closed an average of 71¢ lower (2¢ lower near the back to $3.67 lower in expiring Dec on scant trade).

Feeder Cattle futures closed an average of 36¢ lower, except for unchanged and 2¢ higher in the back two contracts.

Corn futures closed mostly 1¢ to 2¢ lower.

Soybean futures closed 4¢ to 10¢ higher through Sep ‘23 on drier weather in Argentina and hopes of increased exports to China. The rest of the board was mostly 4¢ to 5¢ lower.

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Major U.S. financial indices closed lower Friday as investors closed the books on a down year for stocks with more uncertainty ahead.

The Dow Jones Industrial Average closed 73 points lower. The S&P 500 closed 9 points lower. The NASDAQ was down 11 points.

West Texas Intermediate Crude Oil futures (CME) closed $1.86 to $1.99 higher through the front six contracts.

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The difference between formula net prices and formula base prices increased the past couple of years, according to recent research by Sheppard Rogers, a graduate research assistant in agricultural economics at Kansas State University (K-State) and Ted Schroeder, K-State agricultural economist and director of the Center for Risk Management Education and Research.

Specifically, the K-state researchers compare formula base and net prices over 2016 to 2021. Marketing agreements and formula pricing accounted for more than 60% of fed cattle transactions in 2022.

“Formula trade refers to fed cattle transactions that are not negotiated cash, negotiated grids, or forward contracts,” explain the authors, in Formula Base and Net Pricing Differentials for U.S. Fed Cattle. “Formula base price are the base to which grid premiums and discounts are generally applied to determine net price paid. Formula base prices are not negotiated for each transaction, but rather utilize an externally discovered reference price. Reference prices may include: 1) plant average base prices for fed cattle purchased by a specific plant one or more weeks prior to the expected week of slaughter; 2) USDA reported national or area negotiated cash prices; 3) live cattle futures prices; or 4) wholesale beef prices.”

From 2016 through 2018, Rogers and Schroeder say the net-to-weighted-average base price differential was about $2/cwt., whereas the difference between formula net and base prices during 2020 through 2021 averaged about $3.86/cwt. It averaged about $4.51/cwt. from 2021 through October of 2022 — more than double the value five years earlier.

The economists say the increase over time likely is associated with several contributing factors, including:

  • “…on average pens of cattle sold on a formula with a grid received premiums net exceeding discounts in recent years. This could be in part due to cattle feeders getting better at targeting cattle production and marketing to match grid incentives, avoiding substantial discounts.”
  • “…the percentage of formula transactions that received adjustments for quality grade increased from 70% to 80%; yield grade from 64% to 74%; weight 44% to 49%; and other 33% to 46% (Schroeder, Coffey & Tonsor 2021). This indicates more transactions are associated over time with grids increasing the opportunity for receiving premiums as well as risks for experiencing discounts. Logically if producers are getting better at netting premiums exceeding discounts, the producers would also strive to increase use of grids to determine net prices.”
  • “…Perhaps premiums offered have changed over time creating greater incentives to use grid adjustments…From 2016 to June 2019, premiums for Prime quality grade remained relatively flat, averaging $12.65/cwt. From July 2019 to October 2021 premiums for Prime quality jumped to an average of $14.09/cwt, and in 2021-22 averaged $15.68/cwt. Premiums for Certified Angus Beef (CAB) averaged $3.72/cwt from 2016 to June 2019 and increased slightly to $4.32/cwt from July 2019 to October 2021. CAB premiums from January to October 2021 averaged $4.89/cwt. So, clearly premiums for high quality have increased over time.”

“With more cattle being sold using formula pricing including grid adjustments, not only are strong value signals being sent to producers, but with greater premiums recently for high quality beef, these value signals are also larger than previously,” the authors explain. “Thus, average net formula prices have increased in economically important magnitudes relative to base prices in recent years.”

2023-01-01T17:13:41-06:00

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