Fed cattle break $1 mark

Markets
Apr 9, 2010
by WLJ

Fed cattle break $1 mark

Early fed cattle trade last week jumped above the $1 level in nearly all of the major feeding regions. The market’s ability to defy gravity and continue to trade higher caught many analysts off-guard, showing that demand is perhaps higher than anyone expected. Trade came as early as last Tuesday in some regions, with sales in the North at $101-102 live basis and at $163 dressed. In the southern Plains, trade occurred Tuesday and Wednesday last week in a range of $99-100 live basis with heavy volume trading in most areas. Trade for the week was mostly $3-4 higher than the previous week’s action.

Analysts noted last week that current cattle availability is very limited, which has packers scrambling to secure inventory to meet their needs, a trend that is expected to remain in place for the foreseeable future, according to Vetterkind Cattle Brokerage analyst Troy Vetterkind.

"It was said that buyers in the north were already inquiring and looking over next week’s showlists," he noted. "Next week’s market looks like it could be higher again. Even though we are at pretty lofty levels, supplies of slaughter-ready livestock are tight right now and will remain that way for the foreseeable future."

Vetterkind said that demand for beef and pork is relatively strong right now, although there are some signs that resistance to higher prices is developing among wholesale and retail buyers, although that appears to be having little effect on packer’s willingness to pay higher prices for cattle, while increasing slaughter levels. The week-to-date harvest through last Thursday stood at 491,000 head, with the industry looking for a kill of 637,000 head, 22,000 head more than the previous week and well above the 609,000-head week recorded in 2009.

Vetterkind said that the increased production would do little to halt the run-up in prices.

"The fact of the matter is that most beef buyers are short of product and while some are staying hand-to-mouth on purchases, they are likely going to get run in at some point in time," he said. Grinding beef is tight, which has processors scrambling to get product around them in both domestic and imported markets. This is likely going to be supportive to boxed beef cutout values in the coming weeks as they try to source grinding material from the steer/heifer kill which, in turn, is going to keep the cash fed cattle market supported as packers will need animals to process to fill the void of cow beef."

He said that combination of factors would likely translate into additional strength in the week ahead in nearly all cattle classes as packers worked harder to meet their needs for product.

Although wholesale buyers have been limiting their purchases, making for lackluster movement in the boxed beef markets for several weeks, there is growing belief that a growing number of buyers are getting short on product. Many of them likely got spooked into the market last Wednesday after seeing the price spike above $1, leading to good movement in the boxed beef market with more than 300 loads selling for the day, the biggest volume day in a few weeks, Vetterkind pointed out.

"As a result, we saw increased trading levels on choice ribeyes, shoulder clods, outside rounds, and top butts. As mentioned above, beef buyers are trying to stay hand-to-mouth with their purchases hoping for a break in the market after the recent run up in prices. This is likely going to be the main reason boxed beef values are not going to break for awhile," he said.

Last Thursday at midday, Choice boxed beef was trading 9 cents higher at $164.71 while Select was up 6 cents higher at $163.26 on light to moderate demand and offerings.

Average carcass weights continue to decline and given the heavy slaughter levels, are likely to continue lower for another couple weeks as cattle are pulled forward to meet demand. The average steer carcass weights continue to trend 22 lbs. below last year; the result means that packers are having to dip deeper into feedlot inventories to meet their needs for cattle to fill orders sold weeks ago, Vetterkind said last week.

"Boneless processing beef supplies are very tight as witnessed by boneless cow 90s trading at new highs for the year at $1.64 [last Wednesday]. This in turn had the imported beef market bid sharply higher, as well, yesterday as processors desperately try to source product for their grinding operations ahead of u coming Memorial Day demand," he said. "This has now put many chuck and round items from the steer/heifer kill back to fitting into grinding formulations. So the point being, going forward, is that there is still a lot of middle meat [rib and loin] buying that needs to be done, and with the tightness in boneless beef supplies, buyers are going to turn to steer and heifer [end meats] for a certain part of their needs, which is going to keep boxed beef cutout values holding firm and likely moving higher by the end of the month."

He said that, in turn, wholesale accounts are going to jump into the market soon in order to meet their needs which will likely serve to propel prices higher still as they look to get their needs covered.

Feeder cattle

Feeder cattle prices last week jumped higher, following the fed side upward. The cash markets throughout the U.S. uniformly reported prices that were mostly $2-4 higher than the previous week with some reports of prices which rose as much as $10 for certain classes of cattle, particularly those suitable for summer grazing programs. The grass season in the U.S. is shaping up to be better than any in recent years and cattle producers have been scrambling to secure available cattle to send to pastures across the U.S. Though some market watchers were noting last week that perhaps feeder cattle prices were near topping out, none went so far as to call an actual top to the market despite some scattered reports of five-weight cattle trading above the $140-level. At those prices, analysts urged caution and said that price protection was vital to secure profits later this year.

The run in feeder and stocker cattle prices is largely due to the tight supply of available animals in the U.S., a situation which is normally alleviated, at least to some degree, by imports of cattle from both Canada and Mexico, however, volumes being shipped into the U.S. are down substantially from recent years. There are a number of factors which are unfolding to cut off the flow. As noted last week, feeder cattle are being pursued aggressively in Canada by feed yards north of the border. The U.S. dollar is also trading at or near par with the Canadian dollar, which has cut into the incentive to ship cattle to the U.S. for feeding and processing. The situation has been similar in Mexico where shipments of feeder cattle into the southern Plains for grazing and feeding have not been able to pick up the slack for the tight supplies in the U.S., despite a slight increase.

Last week, there was an additional hitch in the flow of Mexican feeder cattle—border violence, which has been on the increase and has been spilling across the border. In late March, a U.S. rancher was killed by illegal immigrants crossing his Arizona ranch, and last week, two U.S. border inspection facilities were shut down as a result of violence in Mexico. The inspection facilities in Reynosa and Nuevo Laredo were closed, preventing shipments of cattle from entering the U.S. through those two ports.

Texas AgriLife Extension economist David Anderson noted last week that those two ports are responsible for clearing 8-10 percent of all cattle imported from Mexico, meaning that a delayed disruption will have a significant impact on the availability of feeder cattle going into grazing season this year, despite being 30,000 head above the level reached for the first three months of 2009. Anderson noted that there is a strong seasonal component to imports from Mexico, with peaks reached during March, ahead of summer grazing and in November, ahead of the wheat pasture grazing season. However, this year, the volume—which is the equivalent of approximately 3 percent of the U.S. calf crop—is at risk of being cut back as a result of the violence in Mexico. The result could have a severe impact on all segments of southern Plains cattle production, Anderson said.

"Mexican cattle are only part of the story. The U.S. has had an economic advantage in feeding and meat packing. Those cattle come here, helping to fill our feedlots and packing plants, industries where Mexico lacks advantage. In return, the U.S. exports beef to Mexico. Mexico has been our largest annual beef export market since 2004," he pointed out. "This trade relationship with Mexico is particularly important for Texas. Texas feedlots feed a majority of the cattle from

Mexico. The south Texas cattle industry is especially dependent on Mexican cattle for grazing, feedlots, and meat packing. The loss of a couple ports of entry to cattle might be mitigated by moving those cattle through other ports, although it would increase costs.

But, Anderson said, the complete loss of Mexican cattle would have far-reaching impacts on the livestock industry in the U.S. as a whole.

"Those effects would include: probable loss of some feedlots, lost grazing returns, higher U.S. calf prices, cattle prices and, ultimately, beef prices, and, importantly, the loss of some exports as Mexican cattle stay in Mexico for feeding and packing," he said. "Longer term, feeding in Mexico would expand and U.S. beef exports to Mexico would be replaced by domestic Mexican beef."

He said that the border situation is one that U.S. producers need to watch carefully.

"Developments may occur rapidly as the situation evolves, with larger border issues spilling over into livestock markets," Anderson said.

Last week, cash markets in the southern Plains were higher, at least partially due to the tight supply of feeder cattle from Mexico. In Oklahoma City, OK, on a run that was more than 2,000 head smaller than the same week in 2009, feeder steers sold $2-4 higher. Feeder heifers were called $3-5 higher while stocker steers and steer calves were called $4-8 higher. Stocker heifers and heifer calves were reportedly $5-10 higher with extremely good demand reported on all classes of cattle.

Farther west, in Torrington, WY, steers and heifers were selling $3-7 higher with some instances of as much as $8-10 higher on 400-500 lb. and 650-700 lb. steers. The quality at the sale was reportedly very good with large lot offerings suitable for grass and replacement quality heifers on offer. Demand was called very good.

In the southwest at the sale in Prescott, AZ, choice steer and heifer calves were called $4-6 higher last week with yearlings also moving $4-6 higher on a light run of cattle. On the coast in Cottonwood, CA, a good run of feeder and stocker cattle sold at prices called generally $2-4 higher than the previous week’s sale. — WLJ

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