Dairy cull expected to cut into beef market

Markets
Apr 3, 2009
by WLJ

Dairy cull expected to cut into beef market

Fed cattle trade was sluggish at midweek last week, with little activity in the market as of midday Thursday. Analysts said they expected trade to come in at least steady with the previous week. However, a surge in the futures markets last Thursday had improved feedlot optimism. Vetterkind Cattle Brokerage analyst Troy Vetterkind said he expected that there was some potential for late trade to gain perhaps $1, particularly in the southern Plains. Prior week live sales sold between $83 and $84 while dressed cattle traded at $132-133.

Packer margins have been strained by the uneven movement in the beef cutout and last Thursday, HedgersEdge.com estimated packer margins in the red at negative $46.35 per head. Even a weather-forced reduction in production had little impact in packers’ ability to move beef prices higher last week as the consumer demand remains lackluster. However, with the arrival of spring in parts of the U.S., demand is expected to improve seasonally, helping to boost demand and, subsequently, cattle prices.

Cutout values struggled for much of the week last week with Choice and Select prices inverted through last Wednesday. The Choice price regained some lost ground Thursday to trade at $$135.85 while Select traded 70 cents lower at $135.14. Although trade volume picked up slightly at those prices, the load counts were not as strong as analysts had hoped. Slaughter volume was also up from the previous week, which presented significant weather challenges in portions of the southern Plains. Slaughter volume for the week was expected to hit 615,000 head, a good distance from the 650,000-plus head per week the industry will need to work through during the spring and summer to clear inventory.

One area of concern for the industry is the impending dairy cow slaughter which is expected to add approximately 12,000-15,000 head to the weekly cow slaughter well into the summer months. Cooperatives Working Together (CWT) is working on the latest dairy herd buyout which is expected to cull 150,000 head or more from dairy herds nationwide over the next several months. Although demand for cow beef products remains strong, the added volume could certainly take a toll on fed steer and heifer beef prices as consumers shop for bargains.

The dairy industry has been hit hard by the drop in milk prices and the increase in input costs. At the end of last year, costs exceeded milk prices by more than $2 and although input prices have eased from late 2008 levels, the rise in the U.S. dollar in recent weeks means that milk producers are seeing little improvement in their economic situation, leading to a disorderly culling which is flooding some area markets with dairy cows, driving down beef cow prices at a time when beef producers can least afford the competition. Although milk futures prices are improving and may hit the $15 mark by the end of the year, there is little likelihood the relief will improve conditions for dairy producers in time to avoid a sharp downward spiral in cow beef cutout prices which have provided a measure of support for beef producers for the past year-and-a-half.

Some industry analysts have proposed a solution which could help stem the flow of dairy cattle to the slaughter market and protect the margins of beef producers. The proposal includes shipping dairy cattle to operations in Mexico which have been hammered by the spread of bovine tuberculosis. Although there are a number of regulatory hurdles which could block the plan from being implemented, the early reaction to the plan has been positive. The plan, if implemented, could help to stabilize the dairy industry in the U.S. and help to prevent the industry from depopulating too many animals which, in the short-term, could depress beef prices while causing a potential spike in milk prices if the cull goes too far. Likewise, it could help Mexican producers who are facing a massive depopulation of their herds by providing an income and genetics for the future. It may also help repair some of the damage to trade relations caused by Country of Origin Labeling and other recent protectionist trade activities implemented by the U.S., sources familiar with the proposal noted last week.

Feeder cattle

Feeder cattle markets last week improved sharply from the previous week, with grass cattle drawing the strongest demand as pastures begin to improve following the moisture dumped two weeks ago by strong spring storms. The action was particularly good in the mid-south and southern Plains, which should see some of the biggest improvements in pasture condition.

Calves bound for the feedlot also saw some improvement over the past couple of weeks, however, the recent moisture may bring that trend to a halt for awhile as feedlot conditions, particularly in areas which received a good deal of moisture, were reporting terrible mud conditions, especially in parts of Kansas, Oklahoma and the Texas Panhandle. With more moisture in the forecast over the past weekend, buyers were reportedly pulling back on their buying in those areas. The result could cut into cattle prices for the next few weeks and perhaps longer if the next storm in the region, forecast for the weekend, does similar damage.

In Oklahoma City, OK, last week, the run was comparatively small, with fewer than 4,000 head on offer as producers in the region dug out from the storm. At the Monday sale, feeder cattle and calves sold steady to $2 lower. In El Reno, OK, the story was much the same at midweek. All classes of feeder cattle were lightly tested and the few feeder steers on offer sold steady to $1 lower. Feeder heifers sold steady to $2 higher. Demand was called moderate for feeder cattle, with steer and heifer calves steady to $2 higher with good demand.

In Salina, KS, light steers in the 350-550 lb. class were called $1-5 lower last week while those in the 550-800 lb. range were $1-3 lower except those cattle bound for grazing programs, which sold steady to firm. Heavyweight cattle in the 800-1,100 lb. classes were steady to $2 lower. Four- to six-weight heifers were called steady to $2 lower while heifers in the 600-950 lb. range sold steady; overall demand was called good.

The statewide summary for Colorado last week reported good sales with feeder steers and heifers selling $2-5 higher despite the storm late in the week. The largest advance was noted on cattle in the 600-700 lb. class.

In Phillip, SD, last week, the cattle on offer were met with good demand, although a trend was not available due to light offerings in prior weeks, a firm undertone was noted on the several attractive lots available. A few consignments were reportedly unable to arrive due to muddy roads caused by snow melt. Buyer attendance was called very good, with good demand and active trade.

At Cattlemen’s Livestock Market, in Galt, CA, last week, feeder steers and heifers under 650 lbs. were called steady, selling between $105 and $121 on four- to five-weight steers with heifers $5-7 back. Feeder steers and heifers over 650 lbs. were reportedly steady to $2 higher, with 700-800 lb. steers selling between $84 and $91.50 while heifer mates sold $1-1.50 back. — WLJ

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