Market moves higher

Markets
Jan 22, 2010
by WLJ

Fed cattle trade was slow to get started last week ahead of the cattle on feed report due out on Friday. Early week trade in Nebraska and the Corn Belt to regional packers was reported at $140 dressed basis. When the bulk of trade finally got underway, analysts were predicting it would come in a range of $138-139 for dressed cattle in the North and at $86-87 live basis in the South. Trade at those levels would be fully $2-3 higher than the prior week’s business.

There were a couple of factors playing into the uncertainty last week, including a downturn in the boxed beef markets at midweek. Analysts said the boxed market was preparing to top out at the mid-$140 level after retailers restocked their shelves following good holiday clearance levels. Now that process has been completed and, coupled with heavier production for the next several weeks, prices are expected to fall back slightly. Last Wednesday, Choice boxed beef was 85 cents lower at midday at $144.53 while Select slipped 56 cents to trade at $140.41. Slaughter volume for the week through last Thursday was estimated at 511,000 head, up 5,000 from last week and 14,000 from the same period a year earlier.

Cow slaughter has been running above year-ago levels for the past several weeks and the cow beef markets are starting to show signs that they have put in a near-term top, according to Vetterkind Cattle Brokerage analyst Troy Vetterkind. He said the heavier slaughter has been enough to soak up demand, which has in turn forced cow prices lower in most markets over the past week.

"The bulk of the cutter/boner cows this week bring $40-$50 with the top end of cows bringing $50-$54," he said, predicting that both cow beef and Choice/Select markets will start to trend lower.

"I don’t think we will see a big break in the beef market, however, seasonal patterns would suggest we usually see a pullback in prices going into the end of January-first of February," said Vetterkind. "This would fit in with near term fundamentals as we will see larger cattle slaughters for the next three to four weeks and most of the post-holiday beef business has been completed. I would look for lower cutout values into next week."

The increase in beef production is also expected to show up in the cattle on feed report when it is released. The consensus among analysts is that the report will show a very positive picture for the cattle industry. The Jan. 1 on feed numbers are predicted to be, on average, 1.5 percent lower than they were in 2009. Likewise, placements are projected to be down 4.3 percent. Marketings last month were expected to be 2.3 percent higher than in December 2008. This combination of figures paints a very positive picture for the industry which has done a good job of selling beef into a down market for the past year. Despite the current economic picture, when stability returns to the market, beef prices will be poised for a rapid recovery. Already, some analysts are predicting fed cattle prices could exceed the $1 level in the next year if the economic recovery underway in the U.S. continues to improve the fortunes of consumers.

Vetterkind said that the on feed report could be a market mover if it comes in near expected levels.

"[A]s we can see, a 1.5 percent decline in on feed numbers, 4-5 percent decline in placements, and 2-3 percent increase in marketings this year would be friendly to the spring/summer fed cattle market," he reported. "Much of this has been priced into the futures market this year, but I don’t think all of it has. Obviously weather played a big role in this year’s December placement patterns."

He said that he expects a higher spring cash and futures market are still likely as a result of the fundamentals of the business.

He said he expects that a $90-91 market for February live cattle and $94-95 April live cattle are probable.

"Even if we get a minor pull back in near term cash and futures prices, we will be dealing with lower beef supplies and seasonal increases in demand by February/March/April time frames," said Vetterkind.

Feeder cattle

Feeder cattle markets responded favorably to the pull back in grain prices over recent days and the rise in fed cattle trade last week. Most auction markets around the U.S., with the exception of some in the far northern-tier, were reporting cash prices were on the increase last week. Over the past two weeks, feeder cattle prices have gained as much as $10 on some classes of cattle and Vetterkind’s projections for a better than $92 market could likely provide cattle feeders an opportunity to make a little profit despite the rapid rise in calf prices.

The projected shortage of feeder cattle and the expectations that the annual cattle inventory report is expected to show yet another decline in the U.S. cattle herd has had feedlot buyers bidding up for feeder cattle. The question remains about whether or not the market increase is overdone. Regardless, as of last week, there were reports that some yard managers were starting to back away from the market, saying that the increase has gotten a little ahead of current fundamentals.

Last week, futures markets were indicating that higher feeder cattle prices remain a good bet into at least early fall. Despite trending slightly lower as a result of broader market weakness in the equity trade, feeder cattle futures contracts were still at attractive levels. The April contract was trading at $100.43 while August was nearly steady at $101.80 and October was down just 10 points at $101.40.

For cow/calf producers, there was also good news in terms of forage availability through the winter according to the Livestock Marketing Information Center (LMIC). USDA’s annual crop production report showed that hay stocks are higher than year earlier totals which indicates that feed prices should continue to moderate, cutting production costs.

According to LMIC, the report showed that U.S. hay stocks as of Dec. 1, 2009, totaled 107.2 million tons compared to 103.7 million tons in 2008, an increase of 3.6 million tons or 3 percent. Stocks of alfalfa hay at 51.7 million tons were 4 percent higher than last year while other hay stocks posted a 3 percent increase over last year.

"The calculated hay consumption this past summer and fall (May through December) totaled 62.3 million tons compared to 64.2 million tons the prior year, 3 percent less than last year, which contributed to the higher Dec. 1 hay stock number," LMIC analysts noted. "Hay stocks were larger in the Rocky Mountains, Pacific Northwest, the Great Plains and the Southeast than a year ago, while stocks in the southern Plains were down from 2008 due to dry summer conditions, especially in Texas."

In the cash auction markets last week, the trend was higher for cattle in most weight classes. At the market in Oklahoma City, OK, on a big run of cattle, feeder steers and heifers were called $1-2 higher, except steers over 850 lbs., which were called steady. Steer calves sold steady to $2 higher. Heifer calves were $1-3 higher with good demand noted for all classes of cattle on offer.

Meanwhile, in Crockett, TX, feeder steers were reportedly selling steady to firm and feeder heifers sold $2-3 higher than the previous week.

On the West Coast, heavy rains last week battered producers and made movement of cattle difficult in many cases. However, the moisture was welcome relief for producers in areas where they have dealt with continuous drought. Rainfall amounts of as much as 1.5 inches per hour were reported in portions of California. In the mountains, snowfall amounts of several feet were commonly reported last week. The moisture should help to alleviate concerns about stock water and irrigation in parts of the state if it continues.

Green grass in much of the Southwest and California helped to spark markets sharply higher. In Cottonwood, CA, last week, all classes of cattle were in high demand with prices reported from $1-5 higher than the previous week. In Galt, CA, all classes of cattle were called steady with the previous week’s good market. Farther north in Vale, OR, prices were also higher with the best advance coming on the light, greener kinds ready for grass. Prices were called steady to $1 higher on the heavier classes of feeder cattle. — WLJ

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