Fed prices lower, feeder prices follow

Markets
Oct 2, 2009
by WLJ

Fed prices lower, feeder prices follow

Fed cattle markets were showing signs that several weeks of steady trade were set to give way to lower prices with early trade in the Corn Belt and Kansas at prices 50 cents to $1 lower than the previous week in a range of $126-128 dressed in Nebraska and Iowa and at $83 live basis in Kansas. Southern Plains trade was later in developing, but given the action in the northern tier, action was expected to be lower there as well.

Packer margins eroded significantly last week as a decline in the offal price and slipping boxed beef prices took a toll on prices. HedgersEdge.com estimated packer margins were in the red last week at a negative $11.65 per head. The drop in prices had some packing plants considering production cuts in an effort to improve boxed beef prices, although the competing proteins and generally lackluster demand could make significant increases difficult to come by in the weeks ahead.

Last Thursday, Choice boxed beef was sharply lower as packers worked to clear some inventory in what has become a standard midweek fire sale clearance in an effort to stimulate demand. Choice prices traded $1.04 lower, at $136.64 at midday, while Select was off 81 cents at $131.51. The slip was made more significant by the fact that drop prices have fallen nearly $1 from two weeks prior to trade at $8.34 per cwt., cutting most of the profitability out of packer’s operations.

The falling dollar could help stimulate the export which would do a great deal to help repair packer margins and move some better volumes of beef. Last week, the U.S. and European Union (EU) announced the details of their plan to resolve the long-time dispute over beef trade. The plan would allow an additional 20,000 metric tons of duty-free imports of so-called high-quality beef from the U.S. After four years at the expanded quota, the level would rise to 45,000 metric tons in the fourth year of the agreement. In return, the U.S. would agree to drop the retaliatory tariffs imposed on a variety of goods imported from the EU. The deal, if it is ratified, would significantly expand the market opportunity for U.S. producers of non-hormone treated beef at a time when domestic demand is low.

Since the EU is a net importer of beef, demand there could prove to add a sharp boost to U.S. fed cattle prices in all classes of beef since much more product would be eligible to export. Likewise, the recent election in Japan could help to spur movement in the stalled negotiations to increase the age limits for imported beef which would also help to improve beef prices here in the U.S. Last week, Japanese imports of U.S. beef were just 1,500 tons. In addition to increasing the shipments to Japan, the move to relax the restrictions on U.S. beef could help encourage other Asian trading partners to relax theirs, expanding trade with the entire Pacific Rim, which was traditionally the largest buyer of U.S. beef before the discovery of BSE in the U.S. herd.

Since that time, however, Mexico and Canada have stepped into the market to become the two most important U.S. beef buyers. Last week, Mexico was the largest buyer, importing 4,200 metric tons, while Canada lagged behind at just 1,100 metric tons. Until the U.S. economy begins to show signs of improvement in terms of increased consumer spending and better employment prospects, the key to better beef prices clearly lies in improving the export picture.

The other market mover last week, on the cow beef side of the equation, was Cooperatives Working Together’s announcement that it was preparing to accept bids for the third dairy herd buyout, set to begin in November. The announcement last week will add to the more than 225,000 cows already retired this year as part of the program in addition to the others which were taken out of production through other means as a result of the slump in dairy prices over the past two years. The cows will be culled in November at a time when cow beef prices are already working toward their seasonal lows. Already this fall, cow beef prices have started falling as a result of lower demand and higher inventory. Last Thursday, the cow beef cutout stood at $102.45, down nearly $1 from the previous week, while the 90 percent lean product stood at $125.25, down $1 from the prior Thursday, and 50 percent trim was off more than $2 at $44.26.

Feeder cattle

The downward price action in the fed cattle markets caused feedlots to re-examine the prices being paid for feeder cattle last week and prices slid lower, sharply in some cases, for nearly all classes and delivery dates. The contract trade was under pressure last Thursday following a stronger close the previous day to end the third quarter. Last Thursday’s trade was largely the result of a broad sell-off in the equity markets which pressured nearly all other commodity markets as traders looked to book some profits off the recent stock market run. Last Thursday, feeder cattle contracts closed lower across the board with the front months taking the brunt of the day’s selling action. October contracts closed 155 points lower at $94.95, a violation of long-term support which analysts said could pave the way lower to the $90 level before the contract expires if the trade doesn’t quickly reverse. November closed down 172 points at $94.90 while January feeders were off 170 points at $95.80. The markets last week were rattled by signs that the expected economic recovery in the U.S. may be stalled or reversed.

There was also some seasonal lull in the cash markets. USDA market reporter Corbitt Wall noted that with corn harvest and wheat planting currently underway in various parts of the country that farmer feeders and wheat stockers were absent from many markets at a time when calf numbers are starting to see an increase. That absence was at least partially to blame for lower prices in some markets.

For example, in El Reno, OK, last week, feeder steers sold $1-3 lower while feeder heifers were lightly tested but mostly steady. Steer calves were also $1-3 lower while heifermates were $2-4 lower on light demand with buyers showing particular aversion to fleshy, unweaned cattle. Unweaned calves were also discounted on a heavy run at Oklahoma City, OK. Demand was called moderate, but calves sold steady to $3 lower with the full decline noted on unweaned calves, while feeder cattle were called steady.

To the northwest in Burwell, NE, last week, yearling cattle were steady to $1-3 lower on lower-quality lots, while steer and heifer calves were lightly tested with no comparison available. Demand at the sale, which included mostly source- and age-verified cattle, was called very good.

Meanwhile, in La Junta, CO, last Wednesday, steer calves were called $2-3 lower with the exception of 600-700 lb. steers which were $5 lower. Heifer calves sold $2-4 lower except for 600 to 650 lb. offerings which sold steady. Yearlings feeder steers and heifers were called steady on moderate to active trade and moderate to good demand.

In Torrington, WY, steer calves under 600 lbs. sold steady to as much as $1-5 higher, while heifer calves were $1-5 lower. Yearling steers were reportedly steady with a few instances of as much as $3 higher; heifers were under pressure with lower undertones noted. Demand was called moderate to good. — WLJ

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