Fed trade lower despite positive packer margins

Markets
Jan 23, 2009
by WLJ

Northern feedlots sold inventory early in the week last week at lower money in an effort to capture some attractive basis levels. Early trade Tuesday and Wednesday came in Colorado at $81-82.50 live basis, 50 cents to $1 lower than the previous week. Meanwhile in Nebraska and portions of the Corn Belt, dressed trade was reported at $132, about $3 lower than the prior week’s trade.

While the north traded early and at lower money, feedlots in the south remained firmly priced at $87 live as of midday last Thursday, with trade not expected until late Thursday or perhaps Friday without any major shift in cutout values or further erosion in the contract markets, both of which played into the early week sell-off among packers in the northern Plains. Southern Plains trade was expected to be in a range of $82-83 when it finally developed last week.

The cutout values showed signs that they have topped last week and the trend now is expected to take prices lower over the next several weeks. Analysts expect that improving interest by consumers as spring approaches is expected to lead to more featuring by retailers which should help support prices somewhat despite the disappointing macro economic picture. Last Thursday, Choice boxed beef was down 81 cents at midday while Select shed 40 cents to trade at $144.12 on light to moderate movement.

Despite the drop in the beef cutout and lackluster movement of product out of cold storage, packer margins remained solidly in the black last week, with analysts estimating per head profits in a range of $40 to $75. Vetterkind Cattle Brokerage analyst Troy Vetterkind said last week that some of the decline in prices was the result of a drop among wholesale buyers who have reached comfortable inventory levels after replenishing from the holidays and a hand-to-mouth procurement strategy.

"Most of that buying has been completed as of late last week and now, many of the major buyers of boxed beef have moved to the sidelines looking for opportunities in the marketplace. This had packinghouse meat salesmen offering ribeyes, chuck rolls, knuckles, and peeled tenders, along with many other items throughout the beef carcass, at lower money," Vetterkind said. "It appears as though some of the export business we saw the last couple of weeks might have been sufficed as well with chuck rolls and short ribs becoming more available in the marketplace."

However, he pointed out that the demand for ground beef in the marketplace remains very strong and is providing some support, particularly in the cow beef markets.

"Ground beef demand remains very robust at the retail level and in many instances, demand outweighs availability of product," he explained. "With packer margins in such good shape, I would imagine they will want to take advantage of the current situation and overkill for current demand. I will continue to look for a lower trend to the boxed beef market into the end of the month, with Choice cutout values targeting the $1.45-$1.48 area in coming weeks."

Cow markets last week were stronger as a result of the demand mentioned by Vetterkind, with the 90 percent lean trading higher at $143.90 while the 50 percent trim market reached $80.78, nearly double year-earlier levels. The cow beef cutout was also slightly higher, trading at $111.58, a little more than $1 below the same date in 2008.

The strong demand for cow beef, which has helped support prices across the spectrum, could be hampered by the current efforts to complete another dairy herd buyout in short order. There are proposals in Congress which would support funding for the buyout and Cooperatives Working Together (CWT) is pressing to get the program completed within a month. The buyout, which is expected to include 325,000 head, could have a harsh impact on cow beef prices and, subsequently, beef cow prices at a time when they are moving toward cyclical highs in the early spring.

Last week, National Cattlemen’s Beef Association (NCBA) sent a letter to the U.S. Senate which is considering including a package in the stimulus bill to help buyout 6.5 billion gallons of milk production.

According to NCBA, proponents of the buyout are suggesting that USDA absorb some of the beef market impact of the proposed buyout by using USDA food programs to purchase some of the ground product that would be dumped on the market. However, as NCBA noted, a similar plan was implemented in 1986, which did not prevent the cattle market from crashing.

"The 1986 buyout resulted in a 25 percent decrease in the price paid to producers for beef cattle and sent the cattle markets to the lowest point we have seen in the last 30 years. In total, the beef industry saw a $1 billion loss from the buyout in 1986," NCBA officials said last week.

Producers who are planning to market cull cows this spring should be aware of the CWT plan and follow it closely, perhaps taking early advantage of near-term prices rather than waiting to market them.

Feeder cattle

The market was mixed for feeder cattle last week as heavy runs continued in many areas and buyers had mixed emotions on whether the time was right for a purchase. The recent uptick in the market was tempered last week as feeder cattle continue to hit the ceiling imposed by slumping fed cattle trade and futures.

Weather conditions have been favorable to gathering and transporting stock, however, and producers who held their calf crop through the fall to wait for better prices have been rewarded, to a degree, by feeder prices which have come up from their low a few weeks ago.

Analysts say that with profit margins on the mend and packers eager for larger kills, an improved fed cattle market could provide a much-needed boost for the trailing feeder market. Supplies on yearlings and weaned calves are expected to become more current within the next month, also lending favor to the prospects of better feeder cattle trading in the near future.

Darrell Mark, professor of economics at the University of Nebraska-Lincoln, notes that feedlot managers who made the switch to distillers grains to lower costs may have some tough choices to make in the near future. Those who have been active buyers of feeder cattle as a result of improving feeding margins may be forced to step back and assess their feed situation in the near future.

"While overall costs have increased, feeding dry and wet distillers grains and other coproducts have been good risk management strategies to employ because they improve performance and typically are priced less than corn," notes Mark. "Interestingly, in the past two weeks, as corn price dropped dramatically and ethanol plants have shut down, supply of these coproducts has become limited. This is especially problematic for cattle feeders who can’t simply remove it from rations once cattle have been fed this highly palatable feed."

USDA market reporter Corbitt Wall points out that although fed cattle prices have put a cap on the feeder market and may cause cattle feeders to take pause, other buyers of feeder cattle are finding the market suitable enough to keep demand going strong.

"The post-holiday surge in feeder cattle demand allowed the market to stretch its legs, but fed cattle prices are holding feeders back. Buyers are wanting to push orders while feeder receipts are heavy and the selection is wide, but the reality of $84 finished cattle and $200-per-head closeout losses forced bids lower on the heaviest feedlot replacements," said Wall. "On the other hand, backgrounders are afforded the luxury of more options and additional time to put cheap weight-gain on their purchases."

Last week’s sale at the Oklahoma National Stockyards in Oklahoma City, OK, saw receipts of 12,749 head where feeder cattle and calves were mostly steady to $2 lower. The best demand was for 600-700 lb. steers, which held mostly steady. After a lower start, calf prices worked higher into the afternoon as demand and calf quality improved. Several thin, long-weaned stockers were available. Demand remained good despite drought conditions in the area. Feeder demand remained fairly good, but not as good as in weeks previous. Heavy runs continued due to large numbers of heavy calves and yearlings being sold that normally would have come to town last fall when prices were lower.

The Joplin Regional Stockyards near Joplin, MO, reported receipts of 6,432 head last week where steers under 650 lbs. were steady to higher. Heifers under 600 lbs. were $1-3 higher, with steers over 650 lbs. and heifers over 600 lbs. $1-3 lower. Demand was moderate to good for calves, and moderate to light for a moderate supply of yearlings. Demand was best for cattle suitable to hold for grass, but cattle that needed to go direct to the feedlot found fewer buyers. The bulk of the calves and yearlings were in medium to thin flesh, with a few fleshy cattle in the offering.

There were receipts of 4,233 at the Winter Livestock feeder cattle auction in Dodge City, KS, last week, where steers from 600-900 lbs. sold $1-3 higher. Steers over 650 lbs. and heifers over 600 lbs. were $3-5 lower. The few offerings of 900-1,000 lb. steers sold steady to weak, with heifers from 550-800 lbs. $2-3 lower. The few offerings of 800-950 lb. heifers were steady to weak. Steers from 350-600 lbs. and heifers from 350-550 lbs. were $4-6 higher in a very limited supply.

Compared to the previous sale, grass suitable, 500 lb. steers trended $5-7 higher last week at the Bassett Livestock Auction in Bassett, NE, where receipts totaled 3,900 head. Other weights remained fairly steady. Heifer receipts from the previous sale were too few to establish a trend, but a fully firm undertone was noted.

The Winter Livestock auction in La Junta, CO, reported receipts of 5,392 head last week where steer calves under 550 lbs. were mostly steady with instances of $2 higher. Weights over 550 lbs. were steady to $2 lower. Heifer calves were steady to $1 lower except for 400-500 lb. heifers which were $3 lower. Yearling feeder steers were steady to $2 lower, with the decline coming on weights over 800 lbs. Yearling feeder heifers were steady to $1 higher.

Last week’s sale at the Riverton Livestock Auction in Riverton, WY, offered 2,795 head for sale where feeder steer calves under 600 lbs. were steady to $1-3 lower, with weights of 600-650 lbs. $3-5 higher and those over 650 lbs. mostly steady. Feeder heifers had higher undertones noted on most classes, with the most advance noted on 400 and 550 lb. heifers. Demand was noted as being moderate to good for all classes.

There were receipts of 5,988 head reported at the Miles City Livestock Commission Company in Miles City, MT, last week where feeder and stocker steers under 700 lbs. sold steady to $2 higher. Limited comparable sales on offerings over 700 lbs. made for no applicable trend, however, a firm undertone was noted. Feeder and stocker heifers under 650 lbs. sold mostly steady to $1 higher, with offerings over 650 lbs. not well tested. Demand was good to very good for all classes, with active buyer participation. Feeder and stocker offerings consisted of mostly long-weaned cattle with numerous series of shots. — WLJ

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