Byproduct demand boosts fed prices

Markets
Jan 29, 2010
by WLJ

Byproduct demand boosts fed prices

Fed cattle trade was slowed by weather across the southern Plains last week where up to an inch of ice was hampering movement across Oklahoma and the Texas Panhandle. As a result, there was little hurry in trading in the region. Farther north in Nebraska, trade was reportedly light by midday last Thursday at $135-136 dressed and in Kansas at $84 live, steady to lower than the prior week’s market action.

Boxed beef prices moved lower last week with Wednesday composite trade moving more than $1 lower on the Choice product with a similar decline reported on Select cuts. The drop in price did help to spur better movement of beef, however, heavy supplies were noted by USDA market reports indicating that further discounting would be necessary in the near future to clear the supply logjam. Last Thursday, Choice boxed beef was down an additional 19 cents at midday at $140.28 while Select was off 23 cents at $136.73 with light movement noted.

In an effort to support the cutout and margins, packers have been ratcheting down kill levels over the past two weeks to keep supplies closely in line with demand levels. The move appeared to be working well with packer margins in the black, with HedgersEdge.com estimating profits at $6.75 per head last Thursday. Slaughter volume was estimated at 489,000 head for the week through Thursday, down 22,000 from the same period the previous week and 12,000 from the same period in 2009.

Livestock Marketing Information Center (LMIC) Director Jim Robb said that the improvement in packer margins was positive for cattle producers at a time of the year when the market is typically slow.

"The good news is that packer margins are positive right now at a time of year when margins are usually not very good," said Robb. He said there are a number of reasons for market optimism for the next few months.

For example, he explained that the decline in fed cattle prices might have been more dramatic had it not been for a sharp increase in demand for beef byproducts from overseas buyers. He said last week that the year-over-year increase in fed cattle prices is a result of improving markets for beef byproducts.

"There has been an increase in demand for hides, tongues and other products from overseas markets, particularly Asia over the past couple of months," said Robb. "It’s a trend that can be expected to continue for the next several months. That has helped to support fed cattle and cull cow prices."

The byproduct price fell below the $7 level a year ago, but has since recovered to trade at $9.56 per cwt. last Wednesday as foreign economies have rebounded. That has, in turn, translated into better prices for fed cattle.

"If you compare beef prices, they are lower now than they were a year ago, whereas byproduct values have improved," said Robb. "The entire increase in fed cattle prices a year ago can be attributed to the improvement in drop prices."

The result has been an increase of $4-5 in live cattle prices from the same period a year earlier when cattle traded slightly above the $80 mark. In order to push prices higher, though, demand may need to show signs of improvement here in the U.S. Demand from the restaurant sector continues to lag and Robb said the drop in business represents a real problem for domestic beef sales.

"I think we’re going to see fed cattle in the doldrums until about mid-February when we might see a little bump when the buying for early March features begins. And then we might see another bump in April," Robb said, noting that those bumps could push fed cattle prices back to the $87-88 level.

"I think the futures markets have cattle priced about correctly right now," he said.

Robb said that the April contract has allowed cattle feeders to price in a profit at current levels, which was welcome relief after the difficulties of the past few years. However, he cautioned that there is a chance prices could turn back down going into the summer months.

Feeder cattle

That summer market is the one Robb urged producers who are still holding yearling cattle to study closely, noting that there are a number of producers who are still looking to feed cattle.

"They are really going to have to look at the summer market to see if they can make it work," said Robb.

He noted that there are a number of producers who are examining the possibility of feeding some of their own cattle, particularly the ones who still hold yearlings on a winter grazing program.

‘They are going to have to take a close look at the summer contracts," said Robb, who estimated there are going to be a number of opportunities to retain ownership again over the next few years.

"We haven’t really had much retained ownership of cattle over the past 10 or 15 years; calf prices have been too high," he said. "But, I think we’re going to see that start to change this year."

He said there may be opportunities for cow/calf producers to work with feed yards to make some profits.

"We’ve talked with some producers who have been looking at the possibility of feeding their own cattle, but with the exception of feeding a few here or there, it hasn’t made much sense. You’re not going to take on that kind of risk to make $5 per head," said Robb. "But now we might be getting into an area where they might be able to lock in $15 or more a head and it’s starting to make sense."

One of the factors that will factor heavily into the market’s future is the continued decline in the U.S. cattle herd. The annual cattle inventory report, due out last Friday, was expected to show yet another year of contraction among beef cattle herds with the pre-report estimates projecting the numbers would show the smallest U.S. beef herd in more than 50 years. The calf crop was expected to be the smallest in 59 years. Pre-report estimates show analysts expect, as of Jan. 1, 2010, the beef cow herd and calf crop to drop 1.5 percent from year-earlier levels. Beef replacement heifers are expected to show a 1.6 percent decline from Jan. 1, 2009.

Last week in auction market sales, prices were generally steady to slightly lower than the previous week in most markets. In Oklahoma City, OK, feeder steers and heifers sold steady to $1 lower, with the exception of the few steers over 900 lbs. which sold $1-2 lower. Steer calves were steady, except those in the 450-500 lb. range, which were $2 lower. Heifer calves were called steady to $3 higher and demand was reportedly moderate to good for feeder cattle and very good for cattle suitable for grazing.

In La Junta, CO, last week, steer calves under 600 lbs. were called steady to $3 lower with the full decline on 500 to 550 lb. calves. Those over 600 lbs. sold steady to $1 lower. Heifer calves were called steady, except for those in the 500-600 lb. class which sold $1-2 lower. Yearling feeder steers were called fully steady. Yearling feeder heifers were steady to $1 higher.

On the West Coast at Galt, CA, last week, steer and heifer calves were steady across all weight classes as a result of the good precipitation the area has received in recent weeks. At the Wednesday sale last week, 500-600 lb. steers were reportedly selling in a range of $105-120 while heifers in the same weight class commanded $90-102. Heavier cattle in the 700-800 lb. range brought $97-111 on the steers while the heifers sold between $89 and $96. — WLJ

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