Demand remains a big unknown despite higher prices

Apr 2, 2010
by WLJ

Fed cattle trade was firming up in the southern Plains at $96 live last week with the call for steady trade in most feeding regions. In the north, dressed trade was expected to unfold in a range of $152-153, steady with the previous week’s action, with most analysts predicting the majority of the volume would come before the end of the day Thursday.

The futures market has continued its steady upward climb for the past few weeks and the steady boxed beef cutout has helped bring packers to the table willing to spend more money to procure cattle from the tight supply of market-ready animals. Pricing on the other side of the equation at the wholesale level has also helped keep packers in the market for higher-price live cattle. Boxed beef prices have held steady in recent weeks and traded mostly sideways to higher last week, protecting recent gains. The Choice product traded 28 cents higher at midday last Thursday at $164.03 and Select added 71 cents during morning trade to reach $161.34. Harvest for the week through Thursday was estimated at 500,000 head, 12,000 more than the same period a week earlier and 8,000 more than the same period in 2009. Supporting prices and production has been a function of a wide array of factors, including supply and the rise in the drop credit, which has helped to boost packer margins.

The very current state of feedlot marketings has allowed feedlot managers to keep the upper hand in the weekly trade, a condition that should continue for the next several weeks. Livestock Marketing Information Center Director Jim Robb noted last week that carcass weights continue to fall, a trend which he expects to continue for at least the next few weeks. That has kept packers aggressive in the market as they need to buy more cattle to meet their tonnage needs. For the week ending March 20, dressed steer weights averaged 820 lbs., down 7 pounds from the previous week and well below the 848 lb. average for the same week in 2009.

"The feeding industry is still working through those cattle that were impacted by severe winter weather and we have a few more weeks before carcass weights bottom out," said Robb. "That will keep packers aggressive in chasing after cattle for a little while longer."

Robb noted though that there is some sideways to downside potential in the market ahead, at least in the near-term.

"If you look at retail prices, and even restaurant prices, none of the increases you’re seeing in the fed cattle market or in the boxed beef prices has been passed along to the consumer yet. We’re still seeing bone-in ribeye feature prices at $4.99 per pound that’s not reflective of current pricing levels. So, everyone in the industry is kind of holding their breath," said Robb. "The period after Easter will really tell the story on the meat buying side. We’ll have to wait and see how consumers will respond to higher prices."

Robb said that there are a couple of wildcard issues in the market that could also help determine the direction going into the spring and summer. One of those factors is the return of the hedge funds which have been instrumental in helping to drive prices higher during the first quarter. Robb noted that the market may be getting a little ahead of main street reality, though, saying that rising prices, particularly for consumer staples and necessities like gasoline, could take a toll on beef demand as they did at the start of the recession.

The number of cattle being imported has started to rise in recent weeks, Robb reported, as price levels begin to pull slaughter-ready cattle in from Canada. According to the most recent USDA data available, for the week ending March 13, slaughter cattle imports from Canada reached 21,648 head, up more than 4,500 head from the same week in 2009. Robb said that numbers haven’t risen further despite the currently good premiums available in the U.S. because of the fundamentals in the northern market and the near par U.S. and Canadian dollars. Canadian cattle numbers are even tighter than those in the U.S. and Robb said Canadian packers have been aggressive at bidding up prices to procure supplies of cattle north of the border, eliminating much of the incentive to ship cattle south.

Where the live cattle markets go from here will rely largely on the actions of the consumer and their willingness to pay more for beef. Robb said there have been some signs that consumers who do have jobs are willing to spend more money, but how much more remains to be seen.

"There is still demand there, but it is nowhere near where we were a couple of years ago from a demand standpoint," he said.

Feeder cattle

Demand from the fed cattle markets has translated into better prices on the feeder cattle side of the market, however, Robb noted that these markets, too, may be near a topping point. He said grass fever has been a big factor in the markets thus far in 2010 and there are signs that impact is beginning to taper off after good early-year moisture nearly nationwide.

"If you look at it from a historical perspective, it’s not unusual to get a strong spring rally ahead of a good grass season. As soon as it became clear that we were going to have a good grazing season in almost all parts of the country after we got good moisture, grass fever really began to set in, to the point where there was perhaps a little bit too much enthusiasm," Robb said. "I’ve had people calling me asking if we were going to run out of cattle. And, of course my answer was that we’ll never run out of cattle."

That said, he noted that there may be tight supplies of certain classes of cattle and more so in some areas. That has been particularly evident in the southern Plains this year where supplies of lightweight grass cattle have been tight and the situation has been exacerbated by a drop in imports of feeder cattle from Canada, and Mexico hasn’t stepped into fill the gap. Imports of feeder cattle from Canada for the week ending March 13 totaled just 3,073 head compared to 15,249 head for the same period in 2009. Imports from Mexico are up just slightly for the same period, not enough to meet the demand in the southern Plains where grass is already coming on.

"The southern Plains grazing outfits are having a hard time finding cattle that meet their needs right now," said Robb. "I think there is a lot of grass this year that is going to be pretty lightly grazed because we’re just not getting the imports this year."

However, he noted that prices are likely nearing a seasonal top and urged cow/calf producers to consider protecting their future marketings.

"I think from here, the market will trade sideways to lower after summer needs are met and lightweight grass fever begins to taper off," said Robb. "For producers looking to market fall calves, particularly seven- and eight-weight calves in the mid-August to mid-September time frame when price will potentially be at their weakest, cow/calf guys ought to consider protecting those marketings. Using the video auction should pay well, but they ought to try to be away from that time frame or forward contract for delivery into that time frame. However, I still think prices are going to be ahead of last year."

In the near-term, Robb said there are still good opportunities to lock in profits, even on heavyweight yearling placements going on feed for the summer market. He said the industry is banking on an increase in summer demand, which is allowing that opportunity.

"It doesn’t happen very often, but there is still a chance to lock in some nice profits right now," Robb said. "But, I think that if people are feeding cattle unhedged for the summer market, they are taking a big risk. There’s a chance to lock in $20-25 profit per head but if they don’t hedge those cattle, they could be risking losses in the area of probably $50 per head."

Going forward, he said that feeding cattle to market in the fourth quarter is also an attractive proposition with a chance to lock in some profits against the December board as well as a pretty attractive opportunity to sell forward into the second quarter of 2011, although Robb cautioned that the first quarter of 2011 looked to be a little soft at the present time.

"Pretty quickly, people are going to start buying animals to feed against those seasonal time frames," said Robb.

In the cash markets last week, prices continued to move higher as a result of the aforementioned grass fever, a decline in corn prices and strong gains in the futures market that pushed feeder cattle to new contract highs. In Oklahoma City, OK, early last week, prices for feeder steers were steady to $2 higher. Stocker steers and steer calves sold $2-5 higher while feeder heifers, as well as stocker heifers and heifer calves, were called $2-4 higher. Demand was called moderate to good with extremely good demand for thin cattle suitable for grass. Farther west in La Junta, CO, steer calves sold $1-3 higher. Heifer calves were reportedly steady to $1 higher. Yearling feeder steers sold $1-2 higher and yearling feeder heifers were steady.

On the West Coast in Galt, CA, last week, feeder steers and heifers under 650 lbs. were called steady to $3 higher while those offerings over 650 lbs. were selling steady to $2 higher on a good-sized run of cattle. Steers in the 400-500 lb. class brought a range of $120-145 while heifermates sold $10-15 back. Steers in the 500-600 lb. range sold between $110 and $140 while heifers in the same class brought a range of $105-116. — WLJ