Saber rattling shakes cattle markets
— Cash cattle, beef slip as futures plunge
In answer to last week’s question: No. The market was not making a comeback. Quite the opposite.
Last week quickly dashed early optimism. On Monday morning, predictions were for a steady to stronger cash market. Near limit-down trade in near-term futures contracts and triple-digit losses in deferred contracts on Monday scuttled those hopes however. Losses mounted as the market reacted to direct threats of attack from North Korea on Tuesday.
“Funds are liquidating long live and feeder cattle positions this week and that is the main catalyst for the lower trade this week,” Troy Vetterkind of Vetterkind Cattle Brokerage summed up late last week, also pointing a finger at the North Korean conflict concerns gripping the market.
Cash fed cattle trade was slow to start on Wednesday with the Fed Cattle Exchange, something Andrew Gottschalk of Hedgers Edge described as “quickly becoming a non-event.” The sale sold only 518 head of the total 1,659 offered, less than a third. This is still far better than the week before when only 5 percent of the total offering sold. Prices for cattle ranged from $114-115.50 with lower prices going for cattle with more deferred deliveries.
By close of trade Thursday, over 117,000 head had been confirmed sold at prices ranging from $114-116 live and $181-183 dressed. Not only are these prices well below the prior week’s prices of $116-118 live and $186-190 dressed, but the volume of cattle confirmed sold on the negotiated cash market was almost double. Packers were likely capitalizing on the boon of still-lower prices following a week that had been thought to be the summer low.
What exactly started the bloodletting in the live cattle futures that helped cash prices fall is unclear. The economic shake-up that followed President Donald Trump’s and North Korean leader Kim Jong Un’s serious saber rattling on Tuesday was felt in almost all economic circles. For example, the Dow Jones Industrial Average lost almost 198 points between its open on Tuesday morning and close on Thursday afternoon. This is the first obvious downturn in what has been a mostly uninterrupted stock market rally since mid-April.
The cattle futures market did not escape either. On Wednesday, following the fiery words and threats from Trump and Kim, every contract on the board posted three-digit losses. All but the two most distant contracts lost over $2.25 in that single day of trading.
Over the course of the week, the August contract lost a net $6.60 to close at $108.85 and the October contract lost $7.50. These prices more than violated recent lows and opened the market up for new lows and lower support levels.
“We should see live cattle possibly stabilize down in this $108-110 area and feeders to do the same down around $140-142, but if indeed we do see conflict break out in the Korean Peninsula all bets are off,” commented Vetterkind. “I think the real threat to the market would be if North Korea launched a missile into either South Korea or Japan, which one would hope that doesn’t happen.”
As of last Thursday, Kim had made direct threats against the U.S. territory of Guam. Various mainstream media outlets were reporting that Kim was threatening to fire four ballistic missiles into the waters near Guam. The small Pacific island boasts over 6,000 U.S. military personnel at the Andersen Air Force Base and Naval Base Guam. Despite its small size, the island is strategically significant in the Pacific. In 2014, the Andersen Air Force Base claimed Guam held “the largest munitions stockpile in the world.”
The matter of declining cutout values and their impact on retail demand for beef was also a central theme of last week’s market.
“Cutout values have retreated to a level that is very attractive to retailers,” noted Gottschalk early last week. “The restoration of retail beef margins, especially for ground beef (following the collapse in 50/50 trim), should bolster total beef demand in the coming weeks. Additionally, beef cutout values are priced competitively with pork cutout values.”
By close of trade last Thursday, the Choice cutout had lost a net $2.98 with a close of $200.63. The Select cutout lost a net $1.12 with a close of $196.19. Whether this counts as a summer low is still yet to be seen.
“The cu tout has been very slow to carve out it’s late July/early August low this year though a seasonally modest rally is still expected between now and the end of the month,” commented Cassie Fish of the Beef Report.
Whether the low has been achieved or not, Gottschalk pointed out that retail margins are being restored. “As such, active beef features should develop. The intense competition at retail for foot traffic favors beef over the competing meats. Movement at retail remains positive.”
Sales of feeder cattle were mixed but mostly down last week. While several of the surveyed auctions boasted higher prices on feeder cattle than the week before, not all were so lucky.
“Feeders will remain on the defensive,” said Gottschalk. “They will not lead any rebound. Rather, feeders and calves need fed cattle to rally to spur their rally.”
Sales of medium and large 1-class (#1) steers weighing between 700-800 lbs. were notably depressed in both frequency and prices. Several sales had no #1, 7-weights reported sold, and price ranges rarely got into the $150s, let alone the $160s that has been the upper-end norm in recent weeks.
Kansas: At the Winter Livestock Feeder Cattle Auction of Dodge City, sales volumes came down from 4,010 to 3,337 head and prices were overwhelmingly lower. Midweight feeder steers and heifers were down $6-8, while heavier steers saw $5-7 discounts and heavier heifers saw $3- 5 discounts. Calves were called a weak steady on few comparable sales. A single, large group of #1, 774-lb. yearling steers averaged $146.23.
Missouri: More cattle sold for steady to higher money in the Joplin Regional Stockyards. Feeders under 700 lbs. were said to be steady to up $4, while heavier feeders were steady. Demand was called moderate to good despite the declines in the futures markets. Sales of benchmark steers ranged from $146-154.
Nebraska: Compared to the most recent sale two weeks prior, the Huss Platte Valley Auction last week sold fewer cattle for less money. Mid- to heavyweight feeder steers were down $3- 4 and there were too few heifers for an adequate market trend. No mention of calves. A 68-head group of #1, 782-lb. yearling steers averaged $152.94.
New Mexico: Sale volumes were up and prices were down last week at the Clovis Livestock Auction. Feeder steers were called mostly $2-4 lower and heifers were down $2 with instances of down $6. A few small collections of benchmark steers sold at $135 and $141.62. The lower price was on a group of calves and very heavy yearlings.
Oklahoma: Prices were mixed at the OKC West-El Reno sale last week. Feeder calves were called firm to up $4 while yearling feeders were down $3-6. A pair of very large groups of benchmark yearling steers sold between $142.50-149.
South Dakota: The Hub City Livestock Auction sold over three times the number of cattle last week compared to the week before. However, prices were severely depressed on comparable sales. Heavy steers were down $2-4 while heavy heifers were down $10 with instances of being down $16.
Demand was said to be very good for cattle coming off of grass. Only two small packages of benchmark yearling steers were reported sold, and prices ranged from $150.25-154.50.
Live cattle futures were not alone in the outpouring of red ink. The feeder cattle futures lost significantly as well. The August contract lost a net $8.78 over the course of the week to settle at $141.17. The September contract lost a net $9.55 to close at $141.30.
“Now we have gotten into our first area of price projections at $108-110 in front month live cattle and the lower $140s in feeder cattle, so we’ll see if the market doesn’t stabilize and consolidate here for a moment,” commented Vetterkind. He opined that if the near-term feeder futures can’t hold $140, “we’ve got another $5 lower in both markets in our immediate future.” — Kerry Halladay, WLJ editor