Fed cattle trade $2 higher

Cattle Market & Farm Reports, Editorials
Dec 20, 2007
by WLJ
The standoff between packers and feeders ended a little earlier last week than it has in nearly a month. Trade got underway last Thursday $1-2 higher in Nebraska at $128 dressed basis with live bids at $80. In the southern Plains, Texas trade began at $80-80.50 which was fully $2 higher than the prior week.

Packers, who, according to HedgersEdge.com, were losing in excess of $10 per head last Thursday, chose to cut kill levels early in the week or close plants rather than continue operations while losing money. There were some reports of plants being dark at mid-week and harvest levels on Wednesday were only 100,000 head, down 26,000 head from the previous week. Harvest levels as of Wednesday were 42,000 head below the previous week and 24,000 below 2005.

It appeared that the reduction in harvest was preventing packer losses from increasing significantly by boosting Choice and Select boxed beef cutout values. Packer margins improved by midweek from Monday’s losses which were estimated by HedgersEdge.com at $18.25 per head. Cutout values also improved. Thursday’s Choice cutout value increased 49 cents to $140.70. Select cutout values rose $1.23, to $126.67, narrowing the spread to $14.02 on moderate demand and light to moderate offerings.
The next major boost to the market is expected to come from advance purchases for the Labor Day holiday in September and the boost from school lunch meat purchases. Those two events could begin to add support to the market in the next couple weeks. The combination of the two events will likely support both the suffering middle  meat complex and the end and trim meat markets.

Extremely hot temperatures and rising gasoline prices are driving down consumer demand for high-priced beef products and demand at the retail level continues to slide. A 31 percent jump in fuel prices over last year has increased average annual fuel spending by $400 per year, according to Department of Energy estimates.

According to Ron Plain and Glenn Grimes, University of Missouri agricultural economists, the effect has been a slump in beef demand and prices. For the first six months of the year, consumer demand for beef has fallen 4.4 percent. Grime and Plain said that increase in fuel price is cutting spending on meat purchases. As a result, prices have also fallen 9.6 percent since the end of June for Choice product. Select product has fallen 6.4 percent since June 30, 2006.

“The good news continues to be that fed live cattle demand for this six-month period was up 3.5 percent from a year earlier,” they said.
Cow carcass values have also fallen from last year and the number of cows being slaughtered as a result of the drought indicate prices will continue lower for at least the near-term. However, the consumer’s unwillingness to pay higher prices for middle meats is driving them to lower priced cuts from cow carcasses. In particular, the grind products are improving. Week to week prices for the 90 percent lean increased more than $6 last week. As of Thursday last week, the overall cow carcass cutout value rose more than $4 from the prior week, boding well for the cow processors.

Last week’s live cattle contract trade on the Chicago Mercantile Exchange (CME) was mixed as traders looked for some firm direction. In all, though, the market set a record for live cattle open interest on Tuesday last week as more fund money poured into the already volatile market. Last Wednesday when fed cattle trade failed to develop as expected, live cattle contracts turned down sharply. The August contract traded down 82 points, closing at $82.92. October contracts were also lower on the day, dropping 72 points to $87.57. Thursday last week, however, saw a comeback as all but the August contract closed the day in positive territory. August live cattle was down 22 points, to $82.48. October live cattle contracts were up 37 points to close the day at 87.95.

The basis between live cattle trade and contract trade last week was causing some alarm that there could be some deliveries taking place unless there is convergence of the two prices. If that happens, contract traders could find themselves holding onto the actual animals in the next couple weeks.

Feeder cattle

The recent mid-year cattle inventory report showed the drought has taken its toll on the expansion of the U.S. herd which could mean some better than expected returns next year. The growth in the beef herd was smaller than expected at only 1.1 percent above last year, meaning there will be fewer calves available for cattle feeders. This tighter than expected supply, particularly now that export markets are coming back online, could translate into improved profitability late this year and next. Currently, cow/calf producers are expected to remain profitable for the next two years. Last week, prices were very near last year’s levels and, in some cases, above 2005 levels. According to Dillon Feuz, agricultural economist at Utah State University, the average price paid last week for 500- 600-lb. feeder steers in Kansas livestock markets was $129.19 which is $6.07 more than the same week in 2005. Prices for feeder steers in the 700- 800-lb. range were $6.27 above 2005 prices at $117.27. Nebraska markets, where calves continue to be weaned early as a result of drought, saw prices in both classes only slightly above 2005, according to Feuz.

Last week, however, prices in most feeder cattle markets were mostly mixed. In Amarillo, TX, compared to the previous week, feeder steers under 600 lbs. were steady to $3 higher, with no comparable sales available on offerings over 600 lbs. Feeder heifers under 600 lbs. sold steady to $2 lower on active trade and moderate demand.

In Oklahoma City, OK, compared to last week, feeder cattle were $1-3 higher. Steer calves $1-3 lower. Heifer calves steady to $2 higher. Demand very good for all classes of feeder cattle. Demand moderate to good for calves despite the continued high heat and extremely dry conditions.

In Joplin, MO, compared to the last week, steers and heifers under 700 lbs. were steady to $2 lower, over 700 lbs. sold steady on moderate demand and supply. Dry, hot weather had returned to the four state area, with a heat advisory in effect at the time of the sale. According to market reports, there were noticeably more light, new crop calves in the offering, as producers look for ways to conserve forage and stock water as dry conditions cause more early weaning.

In Nebraska markets last week, the averages for steers weighing less than 700 lbs. were steady to $4 higher, steers over 700 lbs. trended steady to $2 lower. Heifer offerings trended mostly steady with a weak undertone. Demand was reported to be good to very good, especially for yearlings.

Farther north in Hub City, SD, a good run of feeder steers and heifers sold steady to $2 higher. Most advance came on reputation light fleshed yearlings off grass.