Choice cutout continues rally
—Aggressive purchasing might break the “Great Wall”
As predicted, the cash fed cattle trade did well last week. More than did well, it became a feeding frenzy last Wednesday with over 35,000 head confirmed sold.
“The cash fed cattle trade got pretty exciting again yesterday as packers ended up paying sharply higher money for front-end supplies of cattle to process,” reported Troy Vetterkind of Vetterkind Cattle on Thursday morning.
“Things started on the electronic Fed Cattle Exchange auction where packers started buying cattle in Texas/Kansas for $125-126 but then packers in the north began gobbling up cattle in Nebraska for $129-131.50 live so the southern cattle finished up on the auction at $127-128.25. After the auction packers in the south went to $127-128 bids and bought a lot of cattle that way up to $128.50 in Texas/Kansas. Then in the afternoon northern packers went to $130-132 live and mostly $2.10 dressed where a widespread trade took place that the USDA didn’t pick up in their afternoon reports.”
By close of trade last Thursday, the number of confirmed cattle sold on the cash fed market jumped to almost 112,000 head at $125-132 live and $204-210 dressed. This was above and beyond the strength analysts had been predicting earlier in the week, and broke through previously-predicted resistance levels of $128.
Vetterkind credited the sharp rally to packers—now solidly in the black again—being painfully short-bought and in need of cattle to fill forward orders.
“Just exactly how much more we can put on this cash cattle market in the weeks ahead is yet to be seen, but certainly there is nothing fundamental to suggest we are going to see a large break in the market yet. That said, when the market gets carried away like it has the last several weeks there is usually some sort of near-term top or bottom close at hand. I don’t know if this week was it or not but one does have to wonder about the longevity of such a substantial rally.”
Packers aggressively pulling cattle forward stands a good chance of breaking the “Great Wall of Cattle” expected in April that has been on market-watchers’ minds. Vetterkind said it is likely that “whatever kind of supply bulge we were supposed to get into during April/May might be smoothed out.”
The live cattle futures were resistant to the good news of the cash cattle markets earlier in the week.
When the cash market headed upwards, the nearterm live cattle contracts took a downturn.
“The cattle futures market setback yesterday on what I think had more to do with profit taking at resistance levels above the market and a flush of weak longs that entered the market on Friday’s and Monday’s rally. We had an over 10,000 contract increase in live cattle open interest between those two days and I think the market wanted to go flush the weak longs out,” said Vetterkind on Wednesday.
By Thursday’s settlement, however, the futures markets had recouped all of its losses and then some. The April contract gained a net $1.60 to settle last Thursday at $119.20 and the June contract gained a net $1.93 to settle at $109.43.
The basis—the difference between cash prices and the futures—is a curious thing in the current cash market. Cash is trading at almost $10 over the futures in places. Theoretically, the two will converge, but does that mean the futures prices will rise to meet the level of cash? Will cash come down to meet the futures level? Or will it be some combination of the two?
“There really wasn’t any bearish news out yesterday to suggest the futures break, but people do want to talk about the winter storm in the Northeast hampering meat movement, the boxed beef market topping out, and packers getting leverage over the cash fat cattle market,” noted Vetterkind. He added that he disagreed with all of this, however.
“There was huge retail clearance of meat in the Northeast ahead of the storm, of which those stores are going to have to restock that inventory later this week,” he explained on Wednesday. “There certainly weren’t any signs of the boxed beef market topping out yesterday and if packers have so much leverage over the cash fat cattle market I don’t know why they still would be paying $126 or $130 for spot delivery of cattle in Kansas or Iowa.”
The cutout was the talk of the market-watching circles last week. The Choice cutout has seen meteoric gains since mid-February. Compared to the 2016 low set in mid-October, the Choice cutout has gained over $40, most of it having taken place in the past five weeks. Compared to the 2017 low of $187.63 for Choice on Feb. 10, last Thursday’s Choice close of $222.36 represented a $34.73 gain; almost up a dollar a day.
“We’re seeing a pretty seasonal increase to the cutout,” Marcus Brix, analyst with CattleFax, told WLJ. “But the magnitude with which the cutout rallied so quickly is definitely greater than what the seasonal historical [trends] would suggest.”
He described the cutout situation as overbought, but noted that demand—both domestically and abroad—is doing well for quality beef.
“We are cranking out a lot of better-quality product,” he pointed out, recalling a recent report showing U.S. Choice grading percentage was 73 percent. This is good for two reasons. On the one hand, better-quality product attracts consumers. On the other hand, a larger volume of better-quality product lowers the prices consumers must pay for it in the long run.
Gottschalk had warnings on the short term, however.
“The recent sharp advance in beef cutout values is severely reducing retail beef margins. This will temporarily reduce their interest in beef. Once their margin is depleted, the supply of cattle is secondary. Lack of retail margin will trump supply. Retailers will elect to either raise their average price and/or reduce beef features. Either action will slow sales to the consumer.”
Domestic demand indicators such as income, unemployment, and consumer sentiment are still doing well, however. Export demand is also a bright spot for beef.
“We’re seeing a really, really strong export market today,” noted Brix. “Japan and South Korea are still very strong buyers of our U.S. beef today despite the fact that the level of output from Australia has been waning lately. Even though our dollar is stronger, it’s making it economically viable for at least Japan to continue to import our beef over Australia’s. Their prices are high even though they have a lower tariff rate than we do today.”
Cash tides can help float all boats apparently. Cash feeder cattle auctions posted widespread gains last week across the surveyed auctions.
“Demand continues to be very good for grazing calves, as cattle raisers are eager to turn their cattle out on grass,” noted Vetterkind midweek.
The CME Daily Livestock Report (DLR) brought up an interesting topic related to feeder cattle last week. The Canadian equivalent of the Cattle inventory report was released last week, and the result show that our northern neighbors may not be a growing source of feeder cattle.
“While record profits encouraged U.S. cow/calf producers to expand in the last two years, that has not been the case in Canada,” the DLR pointed out. “The beef cow herd as of Jan. 1, 2017 was estimated at 3.834 million head, almost unchanged from a year ago (just 7,000 head larger) and down 1.450 million head (-27 percent) from the peak in 2005.”
The price ranges on medium and large 1-class (#1) feeder steers weighing between $700-800 lbs. was notably higher last week. Most reported sales had averages in the $130s and the top end of the range fell frequently in the $140s.
Colorado: The Winter Livestock of La Junta sold almost three times the number of cattle last week as the week before. Light steer calves were called up $5-8 while calves over 500 lbs. were steady to up $5. Heifer calves were up $3-5 with instances of up $8 on those under 600 lbs. and were up $1-3 on heavier heifers. Yearling feeders were up $3-5 on steers and up $2-3 on heifers. Price ranges on #1, 7-weight yearling steers ranged from $132-143.
Kansas: The Winter Livestock Feeder Cattle Auction of Dodge City also sold more cattle at higher money last week. Mid- to heavyweight feeder steers were up $1-5 favoring heavier animals, and heifers were steady to up $5 favoring midweights. Two large groups of benchmark yearling steers averaged in the low $130s.
Nebraska: Steers over 750 lbs. sold up $2-4 at the Huss Platte Valley Auction last week. Heifers over 650 lbs. sold up $2-6. Not enough calves for a good market comparison. Numerous packages of benchmark cattle were on offer, ranging from $128.50-137.75.
New Mexico: Feeder cattle under 600 lbs. were steady to up $1 at the Clovis Livestock Auction. Over that weight and feeders started bringing $2-4 more. Two offerings of benchmark yearling steers fetched an average of $126.57 for the 205-head group of 781-lb. steers, and an average of $133.60 for the 59-head group of 724-lb. steers.
Oklahoma: The OKC West-El Reno sale sold over 12,400 head of cattle last week with yearling feeders selling $2-4 higher. Calves under 500 lbs. were said to have a lower undertone, but heavier calves were steady. Number 1, 7-weight steers, inclusive of calves, ranged from $124.50-140.
The feeder cattle futures followed the cash and live cattle markets upwards. The March contract gained over a net $3 with a Thursday settle of $130.55. The April contract had the same settle, representing a $3.88 gain compared to the prior Friday’s settle.
“The strong followthrough support in live cattle futures continues to draw buyer activity into the feeder cattle market with the most significant buying interest surrounding the April and May contract months,” commented John Harrington, DTN Analyst, on Thursday afternoon. “Even though nearby futures have broken through resistance levels of $130 per cwt., the focus on tight trading ranges continues to bring additional support to the market.” — Kerry Halladay, WLJ Editor