Fed cattle market firm

Markets
Jan 15, 2010
by WLJ

Optimism boosts feeder cattle markets nationwide.

—Optimism boosts feeder cattle markets nationwide.

After very limited trade in the southern Plains during the previous week, cattle feeders in Texas sold cattle early last week with Wednesday trade coming in the $85-85.50 range on a live basis. Corn Belt trade occurred in a range of $136-138 dressed while live cattle sold at $84-85 in the region. The advance in the boxed beef markets

The advance in the boxed beef markets, as retailers refilled the beef pipeline following two weeks of short production and better than anticipated demand, has helped push the boxed beef cutout to the mid-$145 level over the past week. That, in turn, has helped to stabilize fed cattle prices at relatively good levels.

Last Thursday, midday trade had pushed the Choice product to $145.24 while Select was up slightly to $139.94. The advance in Choice boxed beef product was more than $5 from a week earlier. Choice boxed beef cutout values were also $2 higher than year-ago levels. Harvest for the week to date period through last Thursday was estimated at 506,000 head, up 12,000 from the same period a week prior and 21,000 more than the same period in 2009.

Weather has also played a role in helping to move fed cattle prices higher. Cold winter weather and adverse feeding conditions in many regions has limited fed cattle performance for the past several weeks. Many feedlots are reporting wet, icy and muddy conditions which will cause cattle on feed to gain poorly, problems which will hamper production well into the first few months of 2010. This limiting factor will serve to help boost fed cattle prices and any additional weather will add to the potential for price gains going forward into spring.

For the time being though, Vetterkind Cattle Brokerage analyst Troy Vetterkind said the market is likely to trade sideways as prices consolidate.

"As in the futures market, the cash markets get a little overdone and need to sit back and take a breather. Weather has certainly broke in the northern/central Plains, which will help cattle recover some of the recent weight/quality losses," Vetterkind said. "The weather forecasts call for mostly open weather for another week-and-a-half when we have more precipitation slated to move into the northern Plains and Midwest, but temps are to remain mild."

The same is true for the boxed beef markets which have climbed approximately $10 since the first of the year, he pointed out.

"Beef demand up until this point has been very strong as retail accounts restock cooler inventories after the last couple of weeks of holiday production cuts," Vetterkind said. "Some of this business is getting wrapped up and one would expect cutout values to begin to drift modestly lower starting next week."

He said packers would do their best to protect their profit margin, which was estimated around the $30 per head level last week. Any sign of decline would result in a cut in production levels.

"I would say that a worst case scenario in the cash market right now would be a $2-$3 break in cash fed cattle prices and a $5-$8 break in boxed beef values by the middle of February," said Vetterkind. "And, perhaps it doesn’t get that bad as futures chart formations are looking pretty bullish and there is still a lot of winter ahead of us. By the time we get into mid February, I think we will be on the back side of our biggest fed cattle numbers and we will begin to see spring beef demand surface. Point being, we can’t rule out a minor setback in cash cattle and beef markets, however (I) continue to feel the lows in the market have been put in and any setbacks would be short lived in nature."

One potential catalyst ahead for the market is the upcoming Cattle on Feed Report due out next week which is expected to show a continuing decline in the number of cattle on feed from year-ago levels. The Livestock Marketing Information Center (LMIC) predicts that cattle on feed numbers will decline 1.8 percent from Jan. 1, 2009, levels. Placements during December 2009 are predicted to show an even steeper drop of 6.3 percent from December 2008 levels. Another positive factor for the market is LMIC’s prediction that December marketings should come in 2.5 percent ahead of prior-year levels, reflecting the same increase in demand that Vetterkind reported.

However, LMIC analysts noted that despite the rather strong demand during December, feedlots, on average, failed to show any profits for the month, adding to the problems piling up for the sector. Those problems, if they are not quickly alleviated in 2010, could hamper cow/calf producers later this year when it comes time to market feeder cattle. Those problems could occur despite the continuing decline in cow and calf numbers in the U.S. as feeders will be unwilling or unable to take on replacements due to the lost liquidity in their operations over the past few years.

Feeder cattle

The sharp drop in the corn market last week after USDA reported the largest crop on record, combined with the better weather conditions across nearly all feeding regions, helped feeder cattle markets to stage a solid rally last week. Feedlot placements, which had been slowed significantly by weather since the first of the year, were picking up, Vetterkind reported last week, which he said has helped demand in auction markets in many areas along with contract pricing on the Chicago Mercantile Exchange.

Vetterkind noted that costs of gain have fallen back to the upper 60 to lower 70 cents per pound. That, along with the improvement in deferred month live cattle futures, has stirred feedlots into action in an effort to procure cattle. The result has been a "huge spike up in feeder cattle futures," which has been supportive of feeder cattle prices.

"We have turned the landscape of the grain markets this week with prices likely to continue to trend lower into the spring. This will keep support under feeder cattle markets as long as the fed cattle trade holds together," he said.

In auction markets last week, feeder cattle prices continued to trend mostly to sharply higher for nearly all classes of cattle on offer with the best improvements noted in northern Plains feeder sales. In Centerville, IA, for example, compared to the prior sale two weeks earlier, last week, steer calves under 550 lbs. sold mostly steady while those in the 550-700 lb. range were called $3-4 higher. Heifer calves in the 450-550 lb. class were $4 higher while those under 450 lbs. and over 550 lbs. sold mostly steady on active trade and good demand. Likewise, in Hub City, SD, last Wednesday, a very large run of feeder steers were called $3-5 higher while heifers were reportedly $2-3 higher than the last comparable sale two weeks earlier. A large number of buyers were in attendance for the sale and demand was called very good.

Farther west at the Diamond Ring Video Sale, the offering by Northern Livestock Video Auction in Billings, MT, noted good demand and moderate to active trade on the numerous load lots of grass cattle and replacement heifers. At the sale, an offering of 200 head of 6-weight steers commanded a sale price of $109.25 while a larger offering of 1,958 head of 700-725 lb. steers averaged $106.37. Heavyweight cattle also sold well with 7,246 head of 850-890 lb. steers selling in a range of $87-92 at the sale last week.

On the West Coast in Galt, CA, last week, the trend was also higher with feeder steers and heifers in all classes selling steady to $3 higher on good buyer demand. — WLJ

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