Down markets are upon us
The decline seems to have finally arrived. Last week saw all markets give ground as the seasonal tide seems to have turned.
“Look for choppy trade to continue, with rallies limited by a weaker cash trend and the expectation of a sharp decline in beef cutout values,” warned Andrew Gottschalk of Hedgers Edge last Tuesday. “The greatest threats to the cattle complex remain the large net long position from the “Funny Money” guys and the adverse effects of advancing retail beef prices.”
As predicted by analysts and market watchers, cash fed cattle gave up some value last week. Packers—who supposedly have enough cattle around them to meet Memorial Day demand—were able to buy cattle several dollars cheaper last week than before. At close of trade Thursday, almost 48,000 head had been confirmed sold with live prices ranging from $129-135 and $205-214 dressed.
“We can probably see the market pop higher after Memorial Day into the Father’s Day holiday but for this week and next it feels like we’re going to be a little softer,” Gottschalk predicted.
The near-term live cattle futures were a lot more interesting than the week-to-week comparison would lead one to believe. The June contract lost a net $2.25 to settle Thursday at $122.92, and the August contract lost a net $2.12 with a settlement of $119.65. However, the intraday movements throughout the week were nausea inspiring.
“The cattle futures market continued to trade in very volatile choppy fashion yesterday, breaking $1 plus, rallying $1 plus, breaking $1 plus, etc. many times throughout the day,” observed Troy Vetterkind of Vetterkind Cattle Brokerage. He went on to speculate that this activity is a function of long liquidation and discount buying.
“Technically, I think the futures market is all right, provided we can hold June above support at $118- 120 and August live cattle above $115, but we could easily go down and test those areas in the coming days as we clean up some of this spec length in the futures. I think we’re going to see more liquidation in the futures market on near-term rallies until traders see some stabilization in the cash markets.”
A good deal of breathless attention was paid to the action of beef last week, both spot prices and the cutout value.
“Product values are about to fall off a cliff, led by a collapse in 50/50 trim,” warned Gottschalk late last week. “Longer term support exists at $119-122. Holiday pricing for meat will be completed this week, leaving a vacuum beneath the beef cutout. The initial downturn from this level could be $10-15/cwt., as retail margins are exhausted.”
The matter of retail margins continues to be an important focal point. Despite lower cattle weights right now, increased slaughter rates have led beef production being up 4.3 percent compared to a year ago. Consumers have demonstrated they want beef— and are economically in an ever-improving position to buy it—but the retailers are the gatekeepers. If retailers raise prices, reduce features, or both, the movement of this increased supply of beef could be troublesome.
“Given the sharp advance in the beef cutout, retail beef margins are minimized. This will result is some sharp increases in average retail beef prices post-Memorial Day,” warned Gottschalk. “Retailers are raising their prices and reducing features for beef. They will be reluctant to reload their inventory anywhere near current price levels.”
Though the decline of the cutout was widely heralded last week, as of print little movement had yet happened. Over the course of the week, the Choice cutout lost all of a net 39 cents to close at $247.21. Select product fell more noticeably at $221.66, a $3.85 loss.
Demand for feeder cattle was mixed across the surveyed auction markets last week. Price ranges on medium and large 1-class (#1) cattle in the 700-800-lb. weight range remained solidly in the $140s-$150s, however.
“Offerings should begin a seasonal downturn as excellent grazing conditions will afford producers an opportunity to defer marketings,” noted Gottschalk.
“Feedlot closeouts are very profitable while feedlot replacement breakevens are sharply below current fed cattle selling prices. This favors an extended period of profitability for fed cattle producers. It will only be a matter of time though before fed cattle buyers spend some of these profits, lending seasonal support to the feeder market on weakness.”
Vetterkind quantified that profitability at “anywhere from $250-$500 per head” depending on performance and hedging status.
Kansas: The Winter Livestock Feeder Cattle Auction of Dodge City sold less than half the volume last week as it did the week before. Limited supplies and few comparable sales made for few comparisons, but where they existed, prices were higher. Two groups of #1, 7-weight yearling steers were reported sold last week. The lightweight (702 lbs.) group averaged $151.44 while the heavy group (783 lbs.) group averaged $146.71.
Montana: Sales volumes were also halved at the Public Auction Yards in Billings, again too lightly tested for an accurate market trend. A lower undertone was noted. All of seven head of benchmark yearling steers weighing 725 lbs. sold at $155.29.
Nebraska: The Loup City Commission Co. sold 1,500 head last week, up almost double from the previous sale. Prices, however, were down with 6- and 7-weight steers selling down $10 while heavier steers were steady. Heifers were called $4 lower. Several groups of #1, 7-weight cattle ranged widely and without overlap with the three groups sold averaging $135, $144.75, and $158.27.
New Mexico: Sales volumes were slightly down at the Clovis Livestock Auction while feeder prices were mixed. Feeders under 600 lbs. were down $5-7. Heavier steers were steady to up $3, while heavier heifers were steady to down $3. The light (718 lbs.) package of benchmark yearling steers averaged $139.20 while the heavy (773 lbs.) package averaged $144.41.
Oklahoma: Though the sales volumes were slightly down last week at the OKC West-El Reno sale, 16,895 head of feeder cattle sold is nothing to shake a stick at. Feeders were called mostly steady to up $2 with the exception of 9-weight steers which were up $4. Calves were generally steady with the exception of heavy 5-weights of both sexes, which were both down $3. Numerous packages of benchmark yearling steers traded in a respectable range of $143-155 with many package averages being in the low $150s.
South Dakota: The Hub City Livestock Auction also maintained mostly steady sales volumes last week, though the comparable sales categories were spotty. Where they existed, prices paid were up mostly $1-4. The trade was described as active on very good demand. Prices on #1, 7-weight yearling steers ranged from $152-161.50.
Like live cattle futures, feeder cattle futures lost slightly more than $2 in near-term contracts over the week. The May contract settled last Thursday at $142.27 (down $2.28) while the August contract closed at $149.35 (down $2.47).
Vetterkind opined that a support level of $145 and a resistance level of $153 in the August contract would be dependable. Speaking specifically of the resistance level, he said, “I think right now it would take some pretty bullish cash news to get above those levels, but perhaps in a couple of weeks.” — Kerry Halladay, WLJ editor