Market provides hedging opportunity

Cattle Market & Farm Reports, Editorials
Dec 20, 2007
by WLJ
July 23, 2007

Fed cattle trade was expected to move lower in most regions last week, although with the exception of a few scattered trades in the north at prices $2 lower than the previous week. Most trade was expected to wait until the release of last Friday’s cattle on feed and cattle inventory reports. Prices in the south, in particular, which were still $4-5 apart last Thursday, appeared to indicate late trade was likely. By mid-day last Thursday, there had been a few sales reported in Nebraska at $140, however, most feedlot showlists were still priced at $142-145 live basis, steady with prior week prices.

The action on the Chicago Mercantile Exchange (CME) last week was lower in the live cattle pit Thursday in anticipation of lower cash trade. That said, the futures market was still trading at a premium, in some cases a significant one, to the cash market. Deferred months last week offered an excellent hedging opportunity for cattle feeders with cattle for the October through December fed market.

“Current futures prices are even more optimistic than market fundamentals, scaling into hedging programs or contracting for slaughter steers and heifers to be sold in October through December looks like sound business management,” said Jim Robb, director of Livestock Marketing Information Center.

Last Thursday, the market gave up some of the premium, however, prices for deferred months were still positive. August dropped 55 cents to $90.82. October contracts shed 82 points and December fell 62 points to close at $96.45 and $98.40 respectively. However, weakness was expected to be short lived ahead of USDA’s release of the two cattle inventory reports, which were expected to be supportive of the markets. In particular, the inventory report was expected to show that herd-building, typical for this point in the cattle cycle, has not occurred. This year’s calf crop was trimmed by sub-freezing temperatures during calving season. In addition, heifer retention has been hurt by drought in the southeast and calf prices which are making it attractive for producers to sell females into feedlots. The result will likely be a mid-year inventory report which shows near zero herd growth. Such a number will support both the live cattle and feeder calf markets which are already anticipating tight supplies ahead.

On the other hand, beef movement out of packing plant cold storage has been mediocre for weeks and last week was no exception. Export products are providing support for the cutout values, while domestic demand lags. Last Thursday during early trade, the Choice boxed beef price dropped $1.16, to $142.36, while Select gained 19 cents to trade at $136.74. Movement was reportedly moderate with 115 loads of Choice cuts, 68 loads of Select cuts, 30 loads of trim and 39 loads of ground product heading for retail markets. Slaughter for the week through last Thursday remained robust with 504,000 head harvested, up from 497,000 head the previous week and 495,000 during the same period last year, showing that feedlots are doing a good job of remaining current and perhaps even pulling cattle forward.

Meanwhile, the cow markets also remain strong. Last Thursday, cow beef cutout value shed 74 cents to trade at $114.76, while the 90 percent lean sold at $140.42 and the 50 percent trim remained near steady at $53.79. Continued strength in the cow beef market has supported the cull prices being paid in auction markets at the mid-$50 range for much of the year and prices are expected to remain strong into fall culling as consumer demand remains high for relatively inexpensive cow beef-derived products like ground beef.

Feeder cattle

Heavy feeder and yearling prices were the story of the week last week following strong video market sales on both Western Video and Superior. Prices for 900 lb. class cattle in the neighborhood of $1.10 were common at both sales. Light calves for nearby delivery, however, were discounted by buyers who aren’t ready to place them in feedlots. Relatively inexpensive grass is available in many parts of the country and buyers and sellers, alike, are taking advantage of the resource.

Fall deliveries of calves also sold well with weaned calves in the 500-600 lb. range selling well, particularly at the Superior sale held in Steamboat Springs, CO. The prices paid for calves bodes well for producers who have consigned cattle to one of several upcoming video sales. Futures prices also indicate a solid market for feeder cattle through the end of the year. Last Thursday’s session on CME ended in mixed territory, with August and September contracts adding five points each to close at $115.45 and $116.47 respectively. October feeders were unchanged at $116.72 and November added 22 points, also ending at $116.47. Virginia Tech commodity marketing agent Mike Roberts encouraged feeder cattle buyers to lock in some price protection by hedging feeder purchases soon.
Falling corn prices, which were spurred by improved moisture last week, continue to be subject to weather issues and will be for the next several weeks. The downward trend has allowed feeders to lock in supplies at what look to be good prices. With the wild fluctuations created by the weather market, it may also be wise to lock in near-term grain supplies at this time, according to Roberts.

In auction market trade last week, the few reported sales with enough volume to call a trend were mostly higher as a result of the market fundamentals, including available grass and growing availability to stored forage. In El Reno, OK, last week, feeder steers were called steady to $1 higher, while heifer mates sold steady. Steer and heifer calves were steady to $2 higher in a light test on moderate to good demand.

In West Plains, MO, last week, steers and heifers sold steady to $2 higher, with yearlings mostly $2 higher. Supply was called moderate and quality was reportedly down from previous weeks’ sales. Demand was also good as a result of good grass conditions, considering the time of year. However, demand was best for yearlings and weaned calves with at least one round of respiratory vaccinations, a trend which will become increasingly important as weaning time approaches.

Farther north in Hub City, SD, compared to the prior week’s sale, feeder steers and heifers sold $2-4 higher on good demand in all classes. Offerings were made up mostly of load lots of feeders in larger consignments.

On the West Coast, in Davenport, WA, no trend was available as a result of the light run for the week, however, trade was active with good demand for offered lots. Meanwhile, at Western Stockman’s Market in Famoso, CA, demand was called excellent for a good run of stocker cattle, with the best demand on the greener quality kind in the 500-600 lb. range. Feeder demand was called good, with a big string of Mexican steers sold to out-of-state buyers at excellent prices.