Fed cattle trade gains traction

Markets
Dec 19, 2008
by WLJ
Fed cattle trade gains traction

—Prices rise after strong futures rally.

Ahead of the holiday-shortened week, fed cattle trade was underway early last Thursday with prices gaining $1-2 over the prior week’s levels. Trade started strong in Nebraska at $132-134 dressed, while in the southern Plains, cattle traders were still working out their differences with offers in the $87-88 range for live cattle, while packer buyers were still several dollars low with bids at $82-83. When southern trade breaks loose, it was expected to come at steady to perhaps $1 higher in a range of $85-86.

The sharp drop in hide and offal values over the past few weeks as export markets for those products crumble has cut into packer margins and the price they are willing to pay for fed cattle. Strong overseas demand had pushed prices this fall to over $11 per cwt. However, last week’s trade was steady at $5.99, cutting into processing margins and helping to drop profit levels into the red. Packer margins, as estimated by HedgersEdge.com, were negative $25.95 per head last Thursday.

The strong gains seen in early week contract trade on the Chicago Mercantile Exchange (CME) didn’t boost optimism in the cash markets as much as it should have. The positive supply-side fundamentals have not overridden concerns about consumer demand.

Likewise, packers are trimming harvest levels, reducing the need for large number of slaughterready cattle. Much of that is priced into trade on the CME where live cattle contracts at mid-day last Thursday were trading lower across the board. December was down 160 points at $84.80, while February had given up 122 points to trade at $85.65. April was down 97 points at $88.47, and June was off 80 points at $85. The beef cutout showed some signs of life last week with a slow and steady turn higher. The demand for spot market product and better-than-anticipated foreign movement allowed packers to clear some inventory, particularly as harvest rates declined sharply last week. Last Thursday’s mid-day Choice boxed beef cutout was up more than $2 over the previous week at $143.86 while Select gained more than $3 to trade at $135.46. As demand begins to improve seasonally, those prices should gain ground to add support to fed cattle prices into 2009. The decline in slaughter will also be supportive well into January.

Pre-report cattle on feed estimates showed analysts expect the declines in cattle numbers will continue their downward trend for the month of November. Average estimates of cattle on feed as of Dec. 1 will be at 93.9 percent of 2007 levels. Likewise, they expected November placements to fall 6.2 percent from year-earlier levels. Perhaps the most disappointing number for the industry will be found in marketings when the report is released. Analysts predicted marketings will slump to 88.8 percent of November 2007 levels. The movement of cattle will be decreased as a result of two fewer slaughter days last month, however, the marketing rate is also behind last November’s pace. That drop is partly reflected by the

falling numbers of available cattle, but also because of lackluster movement into the wholesale and retail supply chains for the month.

Feeder cattle

Recent gains in feeder cattle contracts, along with several other factors, seemed to embolden last week’s feeder cattle market as most auctions reported upticks in price.

The seasonally-low availability of yearling feeder cattle along with the prospect of lowered interest rates for interested cattle buyers also helped contribute to the slight upward move in the cash market, say analysts.

Unfortunately, a number of cattle producers have been left out in the wind, clutching on to their calves only as the market took a severe tumble in recent weeks due to larger economic concerns and lowered expectations for beef demand. Determining how long to ride out the storm and when to market the calves is a tough decision for producers right now, one that will hopefully correct itself in coming weeks.

Dillon Feuz, professor of Economics at Utah State University, says he’s hesitant to recommend a course of action for those producers still holding on to their calves, but that some recent marketplace trends could be useful in making the decision.

"However, I think there are some signals in the marketplace that may be encouraging for those of you who still own calves. In the past 10 days, the live cattle contracts at CME have generally increased $5-7 for April, June and August. They are now back close to the level of mid-November. Each of those contracts would need to gain another $5 to get back to the level they were trading at for mid October. I think this is probably likely in the next few weeks," he said.

Feuz pointed out that January and March feeder cattle contracts each had significant gains last week, and that more upside potential could further strengthen the cash market.

"There is probably another $5 upside potential in those contracts if the live cattle contracts also move higher. That would get the feeder cattle contracts back to where they were in mid October. Cash cattle prices should also increase."

For those who can afford to weather the tough market for awhile longer, Feuz recommends seeking advice from an accountant to deal with the possibility of marketing more than one calf crop in a calendar year.

"Given where we are in the year and the Christmas season, there may not be many good sales until after the first of the year. I suggest you contact your accountant and talk to them about how to handle your tax situation if you have traditionally sold calves in the fall and you will now sell them after the first of the year. You could end up with no sales in 2008 and two calf crops in 2009. There are legal ways to deal with this to avoid undue tax consequences," he explained.

Last week’s sale at the Oklahoma National Stockyards in Oklahoma City, OK, saw receipts of 9,766 head where feeder cattle were steady to $1 higher. The opening was barely steady but strength was noted by mid-session. Steer and heifer calves sold $2-4 lower. Demand was good for feeders and light to moderate for calves. The lack of wheat pasture, along with the current dry and cold weather, has left few places for calves to go. It is notable that the weighted averages on number 1 steers weighing from 550-900 lbs. ranges from $91.92 to $88.59, a spread of just $3.33. Most calves now have been weaned and the spread between calves and yearlings is not as distinct as it once was.

The Joplin Regional Stockyards near Joplin, MO, saw receipts of 4,200 head last week where steers under 600 lbs. sold steady to $2 higher. Weights over 600 lbs. were steady to $1 higher, while heifers under 600 lbs. were $3-5 higher. Heifers over 600 lbs. were steady to $2 higher. Demand was moderate to good for the moderate to light supply. The bulk of the offerings were Wean-Vac calves with a number of Source-and-Age Verified calves as well. Receipts were curtailed as a winter storm hit the area with ice and cold temperatures.

There was a total of 2,192 head received last week at the Winter Livestock Feeder Cattle Auction in Dodge City, KS, where steers and heifers from 300-700 lbs. were steady to firm. Weights from 700-950 lbs. were $2-4 higher.

Last week’s sale at the Tri-State Livestock Auction in McCook, NE, reported receipts of 2,700 head where steers and heifers were steady to $4 higher. No comparison was available on yearlings. Demand was good and trading was active on all weights.

The La Junta Livestock Commission Company in La Junta, CO, received 2,378 head for sale last week where steer calves under 500 lbs. were steady and weights over 500 lbs. were $1-2 higher. Heifer calves under 550 lbs. were steady to $1 higher, with weights over 550 lbs. going $3-5 higher. Yearling feeder steers were $1-2 higher, with yearling feeder heifers moving $1 higher.

The Miles City Livestock Commission in Miles City, MT, reported 1,037 cattle received last week. Though there were not enough feeders to determine a market trend, demand was good for all classes. — WLJ

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