Trade starts early

Markets
Mar 26, 2010
by WLJ

—Fed cattle sell in the south last Monday at prices steady to $1 lower.

Fed cattle trade unfolded very early last week as cattle feeders locked in profitable prices and packers worked to get ahead of rising live cattle contracts on the Chicago Mercantile Exchange. Trade developed in the south Plains at prices steady to $1 lower than the previous week’s trade at $96-97 live basis, while in the north, trade was in a range of $152-154 dressed.

The rising beef cutout value pushed to $163.02 last Thursday, which was 45 cents higher than the previous day’s action, while Select added 47 cents to reach $160.81. Product values appeared to be near a top, with analysts predicting that the fulfillment of spring buying needs would serve to push prices lower over the next few weeks. The volume of beef being moved at current prices has been very light, with just 78 fabricated loads moving Thursday morning, adding to the belief that prices would show signs of retreat soon.

Rising values for competing meats have been very supportive of beef prices. With pork and poultry prices posting big gains since the first of the year, it has allowed packers to push beef prices to better levels without hurting the competitiveness of beef at the retail level. However, there are some questions among analysts about how far prices can rise before consumers turn away.

The increase in beef exports over the last month has also been very supportive of cattle prices. Sales of U.S. beef are returning to more normal levels seen before the global recession began in late 2008 when the weak U.S. dollar helped to spur export sales. Last week, sales of beef to overseas buyers hit 14,100 metric tons, an increase of 9 percent from the prior week and 40 percent higher than the four-week average. Interestingly, Russia was the largest market for the week, rising to surpass Mexico, Japan and South Korea, which were also large buyers.

The increase in beef sales to foreign markets has been a welcome boost to the market and is expected to continue as long as the economic recovery continues on track. The weak state of the U.S. dollar has helped to make beef more attractive to buyers overseas and made U.S. products very competitive in terms of price with beef produced in Brazil and elsewhere. Brazil has been the largest supplier of beef products to Russia’s market. However, Brazil’s currency has been gaining strength in recent weeks, allowing U.S. firms to expand their market share in Russia and other markets where U.S. beef competes with theirs.

The added value from byproducts also continues to add strength to fed cattle prices. The improving economy has increased the market for leather goods, which has been the major supporter of the increase in drop values. Last Thursday, byproduct values stood at $10.23, nearly double the value of the same date last year when prices were reported at $5.78 per cwt. The increase since the first of the year has recovered nearly all of the ground lost as a result of the economic downturn and help significantly improve packer margins, which translates into an improvement in fed cattle prices. The byproduct value two years ago stood at $10.69 per cwt.

The increases in contract trade have helped to make the case for the rising price of fed cattle over the past month, despite the fact that the increases appear to be mainly driven by hedge fund buying. The market fundamentals are strong, but whether they are strong enough to support prices at current levels if the hedge funds reverse course is unclear and analysts are beginning to recommend that producers lock in their contracts in the near term. If the commodity traders begin to liquidate their positions in favor of other investments, the market could quickly reverse course, analysts are cautioning. Inflation is apparent in other commodities besides just the cattle complex as low interest rates and a flood of liquidity has pushed money back into commodity markets.

Feeder cattle

Just as analysts were urging caution in the fed cattle markets, last week, feeder cattle markets also showed signs of nearing a top. That is going to play a roll in stocker calf prices in the weeks ahead as many have already fulfilled their needs for grass programs this spring. Further buying will depend on where prices go from here.

"We are approaching our seasonal price peak for calves, which usually occurs in April or May," said Kenneth Burdine, livestock marketing specialist for the University of Kentucky College of Agriculture. "For seven- and eight-weights, the market typically peaks near the end of the summer. It’s an appropriate time to discuss backgrounding, since spring is quickly approaching and many backgrounders are already looking to place calves."

Since the first of the year, prices for stocker cattle have increased, almost on a weekly basis. Summer feeder cattle futures have been increasing as well. For backgrounders, it is this potential buy-sell margin that should drive decisions, Burdine said.

"Even with prices changing recently, gross margin for adding 300 pounds has been hovering around $250 per head," he said.

Burdine noted that producers should also work to manage their risk on the input side of the equation as well, locking up a portion of their feed needs at favorable prices. He said producers can manage price risk on feeders by using forward contracts, commodity futures and options, or through relatively new Livestock Risk Protection Insurance.

"Backgrounding is a margin business, and it’s important to constantly manage those margins to ensure profits," Burdine said.

Last week in most feeder cattle markets, prices were still showing gains from prior weeks and cattle were still bringing good money although numbers were mostly lower with weather and availability noted as the biggest factors in most markets. For example, in Oklahoma City, OK, a late winter storm dumped rain and snow on the region, cutting into the run size. However, despite the muddy conditions which have plagued the southern Plains markets all winter, prices for feeder steers and steer calves were $2-4 higher than the prior week. Feeder heifers and heifer calves were called $1-3 higher on moderate demand.

The market was very strong in West Plains, MO, last week with prices reportedly $8-12 higher on lightweight steers, with some instances of as much as $15 higher noted during the sale. Steers in the 500-750 lb. range were called $3-6 higher, and those over 750 lbs. were $3 higher. Heifers were called $2-5 higher with some spots $6 higher, on mostly the six to seven weights on moderate supply and good to very good demand.

Farther west in Torrington, WY, steers under 600 lbs. sold $5-10 higher while those over 600 lbs. were called $2-3 higher. Heifers under 650 lbs. sold $4-7 higher with some instances of $8-12 higher. Those on offer over 650 lbs. sold $2-3 higher with good quality and demand noted at the sale, with many offerings suitable for turn-out on grass.

Meanwhile in Prescott, AZ, last week, steer and heifer calves sold $2-4 higher and yearlings were sold $2-4 higher than the prior week. And on the West Coast in Cottonwood, CA, the market was reportedly hot with light supplies noted in all weight classes. Stocker and feeder cattle were called $2-5 higher at the sale. — WLJ

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