Big picture volatility impacts cattle market

Cattle Market & Farm Reports, Editorials
Aug 20, 2007
by WLJ
—Turmoil on Wall Street could spill over into the cattle market.

The big picture economic status in the U.S. appeared to be playing a larger role in the beef market last week as concerns in the stock market looked to threaten commodities as well. Three straight weeks of volatility on the New York Stock Exchange, which has erased the equity market’s gains for the year, spilled over into other areas as investors moved money to safer investments.

That shift in investments led to sharp drops in the live cattle contract trade last Thursday on the Chicago Mercantile Exchange (CME) and at the closing bell, August contracts had fallen more than 172 points to end at $90.40. October was the biggest loser of the day, with contracts slipping 222 points to finish at $93.70, while December live contracts gave up 190 points to end the session at $97.

The decline on CME erased most hope for higher fed cattle trade last week. By mid-day, fed trade was fully developed in Iowa at $142 and in Nebraska at $90 live and $142-143 dressed basis. There were also live cattle trading hands in Kansas and Texas in a narrow range of $90- 90.50, steady to slightly lower than the previous week’s trade.

There was a bright spot last week in the fed cattle market as newly formed JBS-Swift announced it was making slow progress toward its planned second production shift at its Greeley, CO, plant. The company intends to hire 1,300 more workers by the time it reaches full production in January 2008. At full capacity, the plant is capable of processing 5,900 head daily, up from its current daily average of 3,700. In a report, JBS, the Brazilian-owned parent company, reported second quarter financial results that illustrate the company has the financial strength to be a major player in the marketplace. JBS reported a 25.2 percent increase in net revenue over the same period a year earlier. Total net profits were reportedly $82.9 million.

Despite the solid performance of JBS, things in the U.S. domestic market last week were a little less rosy. Continued difficulty in boosting the cutout had packers slowing chain speeds last week in an effort to trim available supplies of beef and raise prices. Last Thursday, the Choice boxed beef cutout was up 5 cents to a mid-day price of $144.66, while the Select gained a penny to reach $138.85. Week-to-date harvest through Thursday was estimated at 491,000 head, lower than the same period a week earlier when the tally reached 497,000 head, and 2006 numbers of 495,000 head.

Market analysts last week cautioned producers to pay close attention to the big picture during the weeks ahead. The recent downturn in the market has quickly sapped the economy and last week, a few economists were beginning to speak about the possibility of a recession if the market isn’t able to regain its footing after sharp losses. The possibility of a long-term downward trend or, worse, an actual recession, could quickly impact the beef market as consumers pull back on their spending.

“The supply side of the market is pretty well established right now. We expect on feed numbers and placements to be below a year ago,” said Livestock Marketing Information Center Director Jim Robb. “What isn’t well established is the demand side. Consumer spending trends are notoriously difficult to pinpoint and the big picture is important. Some of these shocks to the market could be difficult to absorb because the economy is on much thinner ice now than it was a year ago. The livestock industry needs to pay attention to the macro-economic situation in the U.S. right now.”

The impact of last week’s stock market instability could quickly spill over to other areas of the economy, scaring consumers enough to cause a cutback in household spending which accounts for two-thirds of all economic activity in the U.S. Robb said that could contribute to a sharp drop in the beef cutout and, subsequently, a decline in fed cattle prices.

“In other countries, consumers tend to cut back on the amount of protein they purchase when money is tight, turning to other foods. In the U.S., consumers don’t necessarily cut back on their protein intake, instead they tend to trade down for lower priced cuts of meat or cheaper proteins, so things like less expensive cuts of beef, pork or poultry become the protein of choice and that has a pretty immediate effect on the more expensive middle meats which causes a drop in the Choice cutout and the result is a drop in fed cattle prices,”

Robb said. “Now, I’m not saying we’re going to drop to $80 fed cattle, but it could have an impact.” Robb said the international market, which has played a key role over the past year in supporting the market, was also starting to show signs of weakness.

“Exports to Mexico, which had been one of the only bright spots, are increasingly a concern in the meat complex. The June numbers continued to show a downward trend in the amount of all meats being shipped to Mexico,” Robb said. According to USDA data for the month of June, the latest statistics available showed that beef exports were down 20 percent from the same period in 2006. Likewise, pork exports dropped 43 percent and broilers were down 11 percent from June 2006.

Feeder cattle

Western Video Market (WVM) held their video auction with a 90,000-head run in Cheyenne, WY, last week and saw strong sales and good demand. Heavy feeders sold mostly for immediate delivery, though some sold a few dollars higher with later delivery dates, mostly in September. The north-central region saw 1,015 head of 850-875 lb. steers sell for an average of $113.64, with an Aug.-Sept. delivery date attached. The same region also saw 4,655 head of five-weight steer calves selling for as much as $134.50, with an average of $127.91 with an Oct. delivery date.

Ellington Peek of Shasta Livestock and co-founder of WVM, said the sale demonstrated an extremely strong calf market, with good sales on the yearlings across the board. Peek also explained that heat and drought in some areas made a few calves tough to sell.

“The calf market is just excellent, but they were a hard sell on the West Coast,” said Peek. “We had probably 92 percent of the calves sell, which is still good demand, but anything for near delivery wouldn’t sell. It’s so dry in the far western states that you just can’t believe it. There’s a lot of guys out there that just flat don’t have any grass to go to,” he explained. Peek also mentioned that sale attendance was very strong, and that somewhat dry conditions in other areas didn’t seem to hamper overall demand.

“We had a packed house there in Cheyenne,” he said. “I think we served close to 400 meals on one day. For most areas of the West, everything just sold really well. Even the Intermountain West, where places had been dry, there seemed to be some fair demand,” said Peek.

Extreme heat and humidity continue to take their toll on auction markets in other areas of the country, mostly affecting receipts, but also depressing prices in some cases. The effect of USDA’s 13.1 billion bushel August corn report has mostly been mitigated by the low movement of cattle due to the high temperatures.

Oklahoma State University Extension Livestock Marketing Specialist Derrell Peel said last week that cow/calf producers need to look closely at the market when making decisions about whether or not to feed their own calves this year. He said high demand for heavy weight feeder cattle and a cost of gain in the 75 cent per pound range for steers presents an opportunity to add weight before selling calves, which remain in high demand due to short supply.

“What this means for stocker and cow/calf producers is that there is an opportunity to look at putting additional weight on animals before they go to the feedlot. Rather than selling calves at weaning or turning over stocker cattle at lighter weights, producers should evaluate the potential for additional time and gain in stocker or retained ownership programs,” Peel said. “Obviously, it will depend on having viable production programs, feed resources and other management considerations, but the incentive is quite strong. When feed grain prices are high, the returns to forage-based gains improves. Responding to this incentive is precisely the mechanism by which the cattle industry exercises the flexibility we have to utilize less grain and increase the competitiveness of beef relative to other meats.”

Meanwhile in the cash market at El Reno, OK, last week, feeder steers were $1-2 higher than during the previous week’s sale, with feeder heifers $1-3 higher. Demand continues to be very good as the number of feeders remains low this summer. Steer calves were steady, while heifer calves were steady to $2 lower. Demand was moderate for calves. Feeder cattle were in thin to moderate flesh conditions.

In Bassett, NE, 3,400 head were sold last week and the bulk of feeders trended steady, with a higher undertone noted on seven-weight fall calves. The run consisted of average to good quality fall calves and yearlings. Demand was good on all classes and weights.

Compared with the previous sale, feeder steers and heifers sold steady in Hub City, SD, last week. Demand was good with several consignments offered in load lots. Supply was 98 percent over 600 lbs.

In Davenport, WA, last week, 625 head sold, and compared to the last sale, feeder cattle remained firm in a light test. Trade was active with good demand, with feeders making up only 25 percent of total receipts. — WLJ