Contracts pull cash lower

Markets
Feb 20, 2009
by WLJ

Contracts pull cash lower

A steep two-day decline in the futures markets forced feedlots to the table with inventory earlier than anticipated last week with most of the week’s northern trade taking place last Wednesday afternoon. Live sales in Nebraska sold $2 lower, from $78-80, and dressed sales sold $3 to $4 lower, from $127-129. In Colorado, live sales sold $1.50 to $2.50 lower, from $79-80, and dressed sales sold $3-4 lower at $127. Live sales in the Corn Belt sold $1-1.50 lower, from $79-80, and dressed sales sold $3 lower, from $127-129. Trading in Kansas was moderate on good demand. Compared to the prior week, live sales sold $3 lower at $80 and dressed sales sold $3 to 3.50 lower at $127. Trading was slow on light demand in the Texas Panhandle, with not enough sales for an adequate market test. Last week Texas live sales sold at $83.

The Tuesday and Wednesday sell off in the futures markets was directly tied to a lack of demand, according to Cattlehedging.com analyst Kalyn Diamond.

"The economy is bad out there right now and as long as the retail movement is low, it’s going to be tough to get any kind of a rally going," he explained. "Basis is one of the most important factors in the contract market right now. We’ve had a violation in those basis levels, which is adding to the lower trend."

He said that until demand improves, the trend will continue lower.

"We’ve been able to move some beef in recent weeks, but it has been hit and miss. That has retailers worried and they are staying out of the market until they see demand start to increase," Diamond said.

He said that the cattle on feed report, due out last Friday, wasn’t likely to be much of a market mover, regardless of any anticipated bullish supply news. Spring grilling season will start soon in the south, which should help improve demand, and any news of improving export markets could help spur a rally, he said.

"Until demand improves, though, any surprise that comes from the supply side isn’t likely to have much impact on the market," said Diamond.

That lack of demand is also spilling over into the pork and poultry markets as well, despite a pullback in the production of poultry, which should help move prices higher. The reported price for boneless, skinless chicken breasts fell last week, a sure sign that consumers are pulling back in any area they are able. The cut in consumer discretionary spending will continue to hurt protein demand until consumers begin feeling better about their economic condition.

The state of feedlot inventory is also playing a role in sales, impacting not only feedlot marketings, but also the boxed beef markets. Growing carcass weights and a sharp increase in the number of Choice grading cattle is cutting into boxed beef prices. The heavy carcasses are decreasing packer need for volume by allowing them to meet demand with fewer head of cattle. On the other side of the equation, cattle which have spent more days on feed are pushing the number of Choice and Prime grading cattle to 61 percent of the mix. Given the current lackluster demand in the hotel and restaurant sectors, this meat is being discounted, cutting packer margins and pressuring cattle prices lower.

That lack of demand was evident in the boxed beef markets, which continued to slip lower for much of last week with heavy offerings and limited buying interest despite those bargain prices. Choice boxed beef was lower last Thursday at mid-day, trading at $134.47, while Select was just 43 cents behind at $134.04. Trade was light, with just 232 loads trading hands. Slaughter volume was also falling, with the week-to-date through last Thursday reaching just 483,000 head, down 11,000 from the same period the prior week. However, that number was still 7,000 head more than the same period in 2008.

The demand equation on the cow beef side remains the bright spot in the market, despite concerns about the impending dairy buyout. Consumer demand for ground beef and less-expensive whole muscle cuts continues to drive prices in that sector higher with the 90 percent lean market trading nearly $4 above the Choice cutout at $138.29. The cow beef cutout also remained strong, with midday prices last Thursday registering $109.16, up nearly $1 from the previous day. The 50 percent trim rose slightly to trade at $79.85.

Feeder cattle

Early week losses in the futures market didn’t help the feeder cattle markets any last week as most auction markets saw prices sliding, whether it was a little or a lot. General feelings of uneasiness circulating in the financial world when President Obama signed a nearly $800 billion stimulus bill on Tuesday conspired to keep most commodity markets in trouble.

Feeder cattle futures fell sharply early last week, mostly in step with the losses seen in the fed cattle contracts, which were falling as a result of an anticipated decrease in demand for beef in the months ahead.

Cash feeder cattle trade generally mirrored the mood of economists who don’t see a quick solution to the problem of beef demand, and piling on top of the market doubts are cattle feeders who are beginning to slowly either go out of business or cut back operations.

"Needless to say, the record-setting losses in the fed cattle industry is going to cause a portion of the industry to close up shop," says DTN analyst Walt Hackney. "However, it would be presumptuous to say the industry has its shoulders pinned to the mat, but more fairly stated, the industry is on its back and will take extra maneuvers to get back on its feet."

How the industry responds to waning beef demand, high feed prices and short cattle supplies is difficult to pin down, says USDA market reporter Corbitt Wall, although broad economic trends are still usually the best indicator of how market participants will act.

"Today’s commercial cattle feeding is very complex, with numerous combinations of hedging and contract negotiations which makes basic market analysis rarely fit any specific situation. Although, most cattle investors still rely on fundamental supply and demand to guide their general decisions," he said.

Wall also pointed to the tough times in the cattle feeding business, which has a number of owners back on their heels and looking for a way to trim costs, even if it means cutting back their feeder cattle purchases.

"Feed yard closeouts continue to lose near $200 per head, which has cattle feeders and their lenders in a tremendous bind from loss of equity," noted Wall.

The short supplies of feeder cattle are expected to tighten even further as some producers consider retaining calves for herd building in the years to come.

"The availability of lightweight calves is expected to be tight this spring and many backgrounders would rather hold cattle and wait for forage to arrive than to scramble for calves amid dwindling supplies. The much-promoted reduction in our domestic cowherd has caused some producers to think about using a portion of the pasture grass for rebuilding," Wall explained.

Last week’s sale at the Oklahoma National Stockyards in Oklahoma City saw receipts of 11,963 head where compared to the week prior, feeder cattle were $1-2 lower. Steer and heifer calves were mostly steady to $1 higher. Demand was moderate to good for feeders, and good for calves. The supply included several loads of heavy-weight cattle off wheat or grass in medium to fleshy conditions with average to full weigh-ups, with a few gaunt. Most feed yards in the area continue to want replacements.

The Joplin Regional Stockyards near Joplin, MO, reported receipts of 8,178 head last week where steers were steady except for weights from 550-700 lbs. which were steady to $2 higher. Weights over 750 lbs. were steady to $2 lower. Heifers under 600 lbs. were steady to $3 higher, with weights over 600 lbs. steady. Demand was good for thin cattle suitable for summer grazing, and moderate for all others. Supply was moderate to heavy.

A total of 3,896 head were offered at the Winter Livestock Feeder Cattle Auction last week in Dodge City, KS, where steers from 450-650 lbs. were weak to $1 lower. Weights from 650-950 lbs. were $1-5 lower, with instances on 800-850 lbs. of $7 lower. Heifers from 350-700 lbs. were $1-3 lower, with instances of 600-650 lbs. $4-5 lower. Heifers weighing 700-900 lbs. were $3-5 lower.

Steers traded steady to $3 higher last week at the Tri-State Livestock Auction in McCook, NE, where a total of 3,400 head were offered for sale. Comparable offerings of heifers were too few to establish an adequate market trend, but a mixed undertone was evident.

The La Junta Livestock Commission Company in La Junta, CO, reported receipts of 2,074 head last week where steer calves were mostly $2-4 lower, with calves over 600 lbs. dropping $2-3 lower. Yearling feeder steers were $5-8 lower in a light test. Heifer calves under 450 lbs. were weak to $1.50 lower, with weights from 450-600 lbs. $1.50-3.50 lower. Weights over 600 lbs. were mostly $2.50-4.50 lower.

Last week’s sale at the Clovis Livestock Auction in Clovis, NM, offered 2,064 head for sale where feeder steers under 600 lbs. were $4-5 lower, with weights over 600 lbs. doing $1-2 lower. Heifers under 600 lbs. sold unevenly steady, with weights over 600 lbs. moving $4 lower. Trade was active and demand was good.

A total of 3,555 head were offered last week at the Miles City Livestock Commission in Mils City, MT, where feeder steers under 650 lbs. sold mostly $2-5 lower, with instances of $6-9 lower. There were no comparable sales available on offerings over 650 lbs. Feeder heifers under 650 lbs. sold mostly $1-2 lower, with instances of $3-5 lower and no comparable sales available on offerings over 650 lbs. — WLJ

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