Beef has tough retail competition

Cattle Market & Farm Reports, Editorials
Oct 1, 2007
by WLJ

—Packers are losing money with cutout stalled below $148.

Fed cattle trade was extremely slow last week. Packers were offering $92 and feeders were looking for $96. Futures markets started the week with a roar after a bullish cattle on feed report, but slowly declined by mid-week with the October contract at $96.95. The general tone of the fed cattle markets was that prices would be higher and it was apparent trade would take place Friday.

There were roughly 2,500 head traded in the southern Plains early in the week at $95.50, JBS Swift was the buyer. Last Thursday morning, National Packers apparently had bid $95 and weren’t getting cattle bought. There was very little dressed trade and feeders were looking for $147-148. Feeders felt that packers had already worked through their contracted animals and were in need of cattle.

Packers have been throwing feeders a few head fakes over the past few weeks with plant closures and dropping Saturday slaughter schedules. They were attempting to reduce production to bring the beef cutout values up.

Ironically, daily slaughter last week showed that they haven’t slowed down much, with daily kills running over 125,000 head a day. Two weeks ago, there were 645,000 head processed. The week prior, there were 643,000 head processed and last week, they were on track to slaughter around 645,000-650,000 head.

It was clear that packers had beef inventory that needed to be moved and many market watchers were expecting a beef fire sale. That had not occurred as of last Thursday. Packers were able to move a large volume without affecting the cutout value much. For the week ending Sept. 21, there were 8,157 loads traded and the composite cutout was $144.35. Over half the total trade volume was ungraded beef.

Market economist Glen Grimes at University of Missouri pointed out that “everyone in the industry benefitted from the higher retail prices but the packer. The fed cattle prices for January- August were up 8.6 percent. The producer-retailer margin was up 7.8 percent, but the packers’ margin for the first eight months of 2007 was down 17.5 percent from 12 months earlier. In times with tight fed cattle supplies, the packers in the beef industry usually have to work with tighter margins.”

Andy Gottschalk at anticipated that packers would need to get used to more negative margins over the next three years. He said they were losing $35 a head as of last Thursday.

Grimes also pointed out that cow slaughter for the year through the week ending Sept. 1 was up 8.1 percent from 2006. However, cow slaughter for the four-week period ending Sept. 1 was down 5.8 percent from a year earlier, but cow slaughter for the four-week period ending Sept. 2, 2007, was up 24.6 percent from 12 months earlier.

“So even though cow slaughter recently has been below last year, it is still large compared to two years earlier. We do not believe cow/calf producers are changing the size of the cow herd very much in either direction,” he said.

Seasonal increases in slaughter cow numbers in many areas of the country had packers readily filling their harvest schedules. However, the lack of demand from the grinding sector caused movement to be slow, which was expected to continue until prices were lowered. Last Thursday, the 90 percent lean was trading at $126.21 and the 50 percent trim was at $51.44, while the cow beef cutout was at $105.76.

Feeder cattle

The strength in the grain market and weather concerns were the main drivers in the feeder cattle market last week, despite concerns over reportedly tight supplies of calves coming to market. There are many in the grain industry who expect the corn crop will not come in as large as USDA has projected, which could lead to a rise in prices. In addition, export volume remains strong, cutting into already tight supplies despite what is expected to be a record crop. Last week, those concerns pushed Chicago Board of Trade (CBOT) December corn futures toward $3.90 a bushel, with many believing that $4 will be eclipsed in the near future as harvest progress continues to creep northward.

The wheat trade is also starting to impact the feeder cattle market. Winter wheat planting is progressing now in the southern Plains where, according to USDA, 25 percent of the crop is now in the ground. If wheat prices weren’t regularly pushing limit higher on CBOT, there would likely be ample winter wheat grazing available. However, the $9.38 per bushel price makes wheat pasture grazing prospects questionable going into the fall ahead of stocker operations contracting for calves. With wheat prices at their best in recent memory, it becomes questionable how much will be available this year to lessen the cost of calf feeding before moving them into feedlots.

The other variable starting to play a roll in buyer interest in feeder cattle is the seasonal temperature swings now starting to take their toll on calf health. Temperature swings of 30 degrees or more are making buyers more cautious in auction markets, and calves which have been weaned and preconditioned with at least one round of shots are selling at a premium to the fleshy loud lots being sold alongside, particularly in the high Plains region.
On the Chicago Mercantile Exchange last week, feeder cattle traded sideways to lower as a result of the upward movement in grains and despite the steady to higher cash fed cattle trade expected for the week. At the close last Thursday, feeder cattle contracts were mostly lower with the spot month September contract expiring in higher territory, up 22 points ending at $116.07. October was down 42 points at $115.50, while November contracts also lost 42 points to end the session at $115.82 and January declined 35 points to finish at $114.67.

In cash market trade last week at El Reno, OK, feeder steers were steady to $1 lower. Feeder heifers sold steady, except for those over 800 lbs., which were $1-2 higher. Steer calves were called steady to $3 higher, with the most advance on heavier weights. Heifer calves moved $1-3 lower. Demand was reportedly moderate to good for feeder cattle, although the selection of feeder steers was not as attractive as the prior week with several light muscled cattle available. Calf demand was also called moderate to good with the best action of the day coming on long- weaned or preconditioned calves.

Meanwhile, to the north in Joplin, MO, compared to the previous week, yearling feeder cattle sold fully steady. A larger supply of steer and heifer calves traded $1-4 lower.

 Buyers were said to be wary and keenly listening for representation of calves and a description of their background and origin. The calf offering was very uneven as to quality and covered the full range, which is typical of early fall, but not typical for the Four State Area.

In Dodge City, KS, feeder steers in the 300-650 lb. range and feeder heifers weighing from 300- 700 lbs. were sold in large enough numbers for a full market test but a higher undertone was noted. Feeder steers in the 650-950 lb. range were steady to $1 higher, while feeder heifers in the 700-800 lb. class were $1 higher. There was no test on heavier weights.

Farther north in Bassett, NE, compared to the sale two weeks earlier, feeder steers were mostly $2 lower and feeder heifers sold steady to $2 higher with good buyer demand on all classes of cattle on the run, which was comprised primarily of reputation strings of light fleshed yearlings off grass.

In La Junta, CO, last week, steer and heifer calves under 600 lbs. were called $2-4 higher with some instances of as much as $5 higher. Those cattle over 600 lbs. and yearling feeder steers sold steady, while yearling feeder heifers were $2 lower.

At the market in Philip, SD, feeder steers over 600 lbs. sold mostly steady last week, while steer calves under 600 lbs. were called $2-3 lower. Heifer calves under 600 lbs. were $1-3 higher. Feeder heifers over 600 lbs. sold steady to $2 higher. There was reportedly good buyer attendance and the best demand came on load lots of reputation offerings. There was moderate to good demand on all other classes of cattle.

Farther west, in Billings, MT, yearling feeder steers and heifers’ receipts remain seasonally light and not present in enough numbers for a good market test. However, steer and heifer calves were called mostly steady in a very light test with moderate to good demand for calves and yearlings.

In Ogden, UT, feeder steers up to 850 lbs. were mixed last week, but reported to be mostly $4-5 lower, with some instances of as much as $10-15 lower on the lighter weights early in the sale. Steers weighing more than 850 lbs. were mostly steady. Feeder heifers were also mixed but mostly lower by as much as $6-8 with some instances of as much as $12-15 lower, while Holstein steers sold $3-4 lower. Farther south in Roswell, NM, last week, feeder steers were unevenly steady, while heifers under 600 lbs. sold steady to $2 lower and those over 600 lbs. were not offered in enough numbers to call a market trend. — WLJ