Fed cattle market gains strength

Markets
Feb 13, 2009
by WLJ

The fed cattle market appeared to be set for a Friday deal last week as only light trade had developed in the north at $131 dressed. Analysts were calling the week’s action steady to as much as $1 higher when it developed. Packer margins were being squeezed last week and they were cutting production as a result. However, tight supplies gave cattle feeders the upper hand in the week’s trade, allowing them to perhaps move trade levels higher.

Previous week trade came in at $83 in the southern Plains and at $128-132 dressed basis in the Corn Belt with live sales in the north and Corn Belt region in a range of $80-83. Analysts noted that rising carcass weights continue to be a concern for the industry, as weights are setting new records each week, allowing packers to meet production needs with fewer cattle.

The drop in harvest wasn’t readily apparent last Thursday though, as packer slaughter numbers were reported at 494,000 head for the week through Thursday, up 3,000 head from the prior week and 5,000 head form the same period in 2008. Beef supply is clearly outstripping demand at current price levels, which stood at $136.23 on the Choice at midday last Thursday, down slightly from the prior day’s trade. Select was slightly higher at $135.32.

The boxed beef cutout values will continue their slow erosion as beef demand slips lower both in domestic markets and abroad. According to HedgersEdge.com, total beef demand during the fourth quarter of 2008 declined by 6.7 percent from the prior year and was down 13.2 percent from the third quarter.

"The sharp drop-off in third to fourth quarter total beef demand was exacerbated by a sharp decline in beef exports from the summer peak," noted HedgersEdge analysts Andy Gottschalk and Bob Wilson.

Until the summer demand begins to improve, adding some clearance to the domestic retail market, the market weakness appears likely to remain. Gottschalk and Wilson noted that trend should begin soon.

"Seasonally, we would expect improving beef demand to develop during the second quarter. However, that recovery will begin from a substantially lower demand level than occurred in 2008," the said. "While some of the price destruction to the middle meats complex currently being experienced could be alleviated during this period, gains will be limited by constraints on consumer spending, both domestically and abroad."

Although demand is expected to improve seasonally during the middle of the year, prices look to remain a challenge. The Feb. 1 cattle on feed report was getting a good deal of attention last week as analysts’ pre-report estimates showed a wide range of expectations for placement numbers, from slightly below year-ago levels to significantly above Feb. 1, 2008. Livestock Marketing Information Center Director Jim Robb attributed the variance to differing expectations for northern Plains and Corn Belt placements. Robb noted that placements are expected to be larger in the south as a result of the drought in the wheat pasture grazing areas which has pushed cattle into feed yards ahead of normal this year.

"We have also imported fewer feeder cattle from Canada, which we think will result in lower placement numbers in the north," Robb explained. "On the other hand, imports of feeder cattle from Mexico are up from last year, but we think a lot of those cattle went directly into feedlots because there just isn’t much grazing available in Texas and Oklahoma. So I think that contributes to the wide range in expectations this month."

He said the February report is likely to get a lot of attention and could play a significant role in the direction of the markets near-term.

Likewise, he said some of the increase in placements can be attributed to an increase in the number of retained ownership cattle being moved into feedlots.

Robb said those retaining ownership cattle are facing a difficult market if they are planning to market them at midyear.

"It very much depends on what weights you are starting with. If you’re feeding against summer marketings, it’s going to be very difficult. It’s going to be very important for those owners to have a very good risk management plan in place," he said. "I think during March, April and May, there will be opportunities to lessen the risk with the board. There are going to be times when summer contract prices are higher than they are today."

Robb said he expects challenges to remain in the market, but he also said there are better opportunities as the industry looks to the fourth quarter of 2009.

"We are skittish about summer, we’ll need to watch that, but I think we will see the highest prices of the year," he said. "We aren’t going to see a buck, but we expect prices to reach the low- to mid-90s during the last three months of the year."

Feeder cattle

Steers and heifers sold mixed last week depending on the particular auction market. Some northern auctions cancelled sales or had poor buyer attendance due to poor travel conditions, while other areas enjoyed weather conducive to gathering and transporting cattle. Despite regional variances in weather having an impact on last week’s cash trade, the larger specter of a down economy continues to loom large over the cattle markets.

Slowing beef demand, expected to post a steep decline for the first six months of 2009, has meant that depressed fed cattle prices are reflecting negatively on feeder cattle prices. Though fuel and feed prices have fallen, it’s clear that cattle feeders are still paying too much for their cattle.

To top it off, analysts say they expect tight feeder cattle numbers to exacerbate the situation, forcing buyers to pay more for bunk-ready feeder cattle or accept lesser-quality offerings. Market indicators point to the recent large runs of feeders in the northern Plains and upper Midwest slowing down, perhaps over the next couple of weeks.

DTN analyst Walt Hackney pointed out that the earlier-than-normal run of feeders coming off of wheat pasture in the southern Plains will also likely contribute to an early shortage of cattle going into the summer.

"Prospects for available feeders, in the spring months and early summer, look to be sparing in most areas as the first class to feel the pinch could be grass weight cattle that are currently in high demand," notes Hackney. "Cattle feeders, looking for middle weight 625- to 750-pound cattle, are going to have to travel further and look harder to procure the desired kind of cattle and probably at higher money."

USDA Market Reporter Corbitt Wall explained that even finding grass for stockers could become difficult in itself.

"But, there are fewer places to graze herds after the recent expansion of cropland (following record high grain prices) and the continued expansion of urban development and grassland conservation activities," he said. "Plus, the areas of our country that produce the largest numbers of beef cattle have nearly all experienced extreme drought over the last few years and restocking has been conservative."

While slacking beef demand has managed to keep the tight supplies of feeder cattle from causing the market to skyrocket, Wall says this may not be the case once demand picks back up and the shortage becomes more apparent.

"Many industry participants expect the tighter supplies of available feeder cattle to become even more evident within the next year or two. But, hard economic times and severe closeout losses in the cattle feeding business has largely kept the feeder cattle market in check," said Wall.

Last week’s sale at the Oklahoma National Stockyards in Oklahoma City, OK, saw 11,685 head available for sale, where feeder steers over 700 lbs. and heifers over 600 lbs. were steady to $1 higher with the strength coming late in the day. Lighter weight stocker cattle and calves moved $1-3 higher. Demand was very good for grazing cattle, with regional rainfall early last week being enough to revive the wheat a bit and encourage producers waiting for anything to turn out on. Feeder demand was good and gained strength as the day progressed, and the run included several cattle in thin condition with many high quality feeders.

The Joplin Regional Stockyards near Joplin, MO, reported receipts of 7,127 head last week where steers over 650 lbs. and heifers over 600 lbs. were steady to $2 higher. Steer calves under 650 lbs. were called steady to $2 lower, with heifer calves from 500-600 lbs. $1-2 lower. Heifers under 500 lbs. were $6-10 lower following the previous week’s sharply higher market. Demand was moderate for the moderate to heavy supply. The unusually warm, dry weather provided an opportunity for producers to move cattle off winter pastures and into the marketing channel.

A total of 3,747 head were received for sale last week at the Winter Livestock Feeder Cattle Auction in Dodge City, KS, where steers and heifers from 350-700 lbs. were steady to $5 higher. Steers from 700-850 lbs. were steady to $1 higher, with weights from 850-950 lbs. steady to $1 lower. Heifers from 700-850 lbs. were steady to firm, while 850-900 lb. heifers were $3 higher on a light test.

South Dakota Livestock Sales in Waterton, SD, reported receipt of 900 head at their sale last week where feeder steers and heifers sold mostly $2-3 lower. The day’s offering was mostly in small drafts, and buyers were most interested in calves with lighter flesh suitable for going to grass. Buyer attendance was good with moderate to good demand.

The La Junta Livestock Commission Company in La Junta, CO, had 1,536 head available for sale last week where feeder steers under 500 lbs. were steady, with weights from 500-700 lbs. $1-3 higher. Feeder heifers under 500 lbs. were steady to $1 higher, while weights from 500-700 lbs. were $2-3 higher. Feeder steers over 700 lbs. were steady to $1 higher, and heifers of the same weight were steady in a light test.

Last week’s sale at the Riverton Livestock Auction in Riverton, WY, saw 4,319 head offered for sale where feeder steers were steady to $2-3 higher, with instances of $5 higher. Feeder heifers under 600 lbs. were steady to $1-2 higher, with weights over 600 lbs. under pressure with instances of $2-5 lower. Demand was good with moderate buyer attendance.

A total of 1,575 head were received last week at the Miles City Livestock Commission in Miles City, MT, where feeder steers and heifers under 500 lbs. sold $2-5 lower. Offerings weighing 500-700 lbs. sold steady to $2 higher, with instances of $3-6 higher on five to six weights. Offerings over 700 lbs. were not well tested, however, a lower undertone was noted. — WLJ

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