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Packers cutting production rate to stem margin losses

Cattle and Beef Markets
Feb 17, 2014

While the cash trade last week seemed indecisive—at first sending signals that the market would be steady to lower, then later suggesting it would be steady to higher—the big questions focused on what packers would be doing. Deeply in the red at $85-115 losses per head, packers were said to need to either buy cattle cheaper or move the cutout higher to recoup losses. Based on where the cash fed and live futures markets stood at the end of day last Thursday, it seems advancing the cutout is the only recourse left for packers.

By Thursday afternoon, too few cattle had sold to call the week’s cattle buying over, but the average price for steers and heifers was $142 live and $223 dressed for a few heifers. Though this was lower than the prior week’s initial high, and the $145 area of the week before that, it was certainly higher than most of the packer bids of $138 that had surfaced earlier in the week. Analysts estimated that cash prices would advance a bit last week and this week.

“The first level of resistance in the cash market is at $144 followed by $148,” noted Andrew Gottschalk on Thursday morning. “It is a yo-yo affair driven by cuts in production as opposed to gains in demand. That said, the reduced production levels should offset any reduction in demand due to adverse weather. We would not expect a return to the recent cash highs scored at $148-$150.”

Packers have indeed been cutting production, and cutting deeply. Last week’s estimated production rate was set at “challenged to exceed 560,000” head. This comes after several weeks of production rates in the 560,000-580,000 area as packers desperately try to match beef availability to demand, while at the same time keeping cutout prices at levels that won’t send consumers trampling one another to get to the pork section of the meat case. It’s a difficult balance to strike to be sure.

On the one hand, the situation isn’t too surprising for this time, explained Steve Meyer and Len Steiner with the CME Daily Livestock Report.

“The challenges for packers this time of year are not entirely unusual and margin pressure is par for the course. After all, beef demand tends to be soft and with the coming Lent period it is unlikely it will get much better, at least through the end of March. Cold and snow negatively impact foodservice performance and consumers hunker down.”

On the other hand, however, the calendar is helping packers in a way. During the cold winter months, the movement of cattle to market and/or to slaughter is slowed, as is cattle performance, both of which can mechanically aid the effort in keeping the beef industry current via declining carcass weights.

Troy Vetterkind of Vetterkind Cattle Brokerage put some surprising numbers to the nationwide cutting of production at beef packing plants.

“Slaughter hours continued to be curtailed with some of the major beef processors moving from 36 hours to 32 hours this week,” he said Thursday morning.

The tactic might be working. According to Gottschalk, the interim low has likely already been achieved for cutout values now that the $206-210 support has been hit.

“Three consecutive weeks of sharply reduced production with another week of limited production next week has set the stage for product values to begin their recovery,” he said Thursday, opining that cash prices will follow any cutout recovery upwards.

By Thursday afternoon, USDA gauged the Choice cutout at $208.10, down from the prior-Friday close of $210.77, and Select closed at $207.76, down from $209.19. Though lower than their prior-Friday comparisons, the Thursday afternoon prices were both higher than their morning prices.

“The current retail beef price of $5.04 will sustain a max cutout at $208-$210 and fed cattle cash price of $136-$138,” asserted Gottschalk. “Our expectation is that retailers will advance prices a minimum of $0.15 per pound in rapid fashion. The new and higher retail beef price could support a max cash cattle price of $143; good news for producers, bad news for consumers.”

Another thing that seems likely to help the fed cattle prices was the action of the live cattle futures last week. A slight rally occurred between Monday and Tuesday of last week and the market held onto most of those gains throughout the week. Compared to the prior-Friday close of $141.20 for February and $140.40 for April, last Thursday saw those contracts close at $143.15 and $142.40, respectively. The June contract, on the other hand, closed at $132.75.

“There is a significant discount between April and June futures at this point, a discount that reflects the normal seasonal, as well as uncertainty about beef demand past May,” noted Meyer and Steiner. “Market participants recognize that the start of the grilling season will push up beef prices. It happens every year and it’s a fair bet to think it will happen again this year.

Ultimately, they called consumer demand “a big wild card.”

Feeder cattle

Though tough weather was still a problem in many areas of feeder cattle country, cattle feeders came back to sales last week with a vengeance. Most sales called their feeder cattle higher, with medium and large 1-class (#1) steers in the 700-pound range steady to slightly higher.

Colorado: At the La Junta Livestock Commission Company Inc., receipt numbers were getting back to what they were last year at almost 800, compared to last year’s 1,000. Peewee steers were called steady while steers over 400 lbs. were up $2-4 with instances of up $8-10. Light heifers were up $2-3 with heavier heifers steady. A package of 720-pound #1 7-weight steers went for an average of $167.08.

Iowa: In the feeder auction of Humeston, just over 1,000 receipts were collected with no trend offered. The majority of the offering was feeder cattle over 600 lbs. The 7-weight #1 steers quoted were all calves and ranged from the lower $160s to the lower $170s based on weight.

Kansas: In Dodge City’s Winter Livestock Feeder Cattle Auction, the prior week’s volume of sales was blown away with over 2,300 receipts collected. Benchmark steers were steady, while those over 800 lbs. were called “weak” to down $2. Lighter feeders of both sexes were too few for a quote. The yearling #1 steers reported sold between $165/13-172.91.

Nebraska: The Bassett Livestock Auction collected over 3,300 receipts last week with great demand on the reputation cattle brought to the sale. Feeders of both sexes were called steady to up $7 compared to the prior sale. The lowest price brought in by 7-weight, #1 steers was $174.59, with some lighter-weight calves and some fancy yearlings pushing the mid-$180s. At the same time, in the Huss Platte Valle Auction, over 5,000 receipts were collected. Feeders were said to sell unevenly steady with good demand. Prices for benchmark yearling steers were not as impressive as at Bassett, but large volumes of steers sold between $169.24- 176.04.

Oklahoma: The OKC West, El Reno Livestock Market saw depressed receipts compared to the same sale last year, but was in keeping with the prior sale’s almost 1,400 receipts. Feeders of both sexes were called $2-3 higher, though on limited comparative sales. No trend was offered on calves. Continued cold weather was credited for the low volumes. Standard #1 yearling steers sold in the $165 area, while fancy or thin-fleshed yearlings were around $170.50- 171.

Though live cattle futures got all the limelight, nearterm feeder cattle futures got most of the glory, gainwise. Compared to their prior-Friday closes of $168.67 for March and $168.53 for April, by close of trade on Thursday, March had gained $2.06 with $170.73 and April had gained $3.07 with $171.60. — Kerry Halladay, WLJ Editor

Sales Calendar

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