Analysts: Feeder cattle price protection warranted

Markets
Apr 16, 2010
by WLJ

Fed cattle prices were mostly steady last week on trade that came early. Most of the week’s action was wrapped up by Wednesday, although volumes were reportedly light, leaving many showlist cattle to carry over into the following week. Most of the week’s trade came in a range of $99 live and $160-161 dressed, steady with the week prior.

Analysts last week were cautioning that the market could begin to slip lower, with the futures and boxed beef both showing signs of turning downward late last week. The movement in the boxed beef markets has been relatively light at the current high price plain achieved by the market. However, when a correction does emerge, market-watchers like Vetterkind Cattle Brokerage analyst Troy Vetterkind said they expect it won’t slip far.

"As the week wears on, the fed cattle market starts to take on a softer tone as feedlots become willing sellers given attractive basis opportunities. The beef market is starting to get a little soft as we get into midweek as well, which, along with lower futures every day, is giving packers some leverage to buy cattle steady to lower," he said. "If packers are through buying cattle for the week, we will see some carryover cattle for next week and they will also have a few more contract/formula cattle to call on, all of which could be a little detrimental to the cash market for next week. Futures are implying at least $1 lower for next week already."

Near-term support for the boxed beef market is also not far below current levels, with support noted at the $162 level for the Choice cutout.

Beef demand is showing good signs of improvement, which has allowed the current rally this spring to exceed most expectations. It’s clear that the domestic market has improved significantly from the dismal year posted in 2009, however, export sales have been a big factor in paving the way to higher prices. The demand among foreign buyers for all classes of U.S. protein has allowed rising prices for pork, poultry and beef, which has benefitted producers this year. According to USDA’s most recent statistics, during February, U.S. pork exporters shipped 361.6 million pounds of carcass weight equivalent pork products overseas, an increase of 15 percent from January and 6 percent higher than February 2009. Japan and Mexico remain the two largest consumers of U.S. pork. Although sales to Japan are down 7.5 percent so far in 2010, Mexico has picked up some of the slack with sales 23 percent ahead of 2009 levels for the year-to-date period. The pork markets are of primary concern because excess pork production that can’t be sold overseas is moved on the U.S. market at lower prices which, in turn, suppresses beef prices in a fashion similar to what beef producers experienced in 2008 and 2009.

There was additional good news for beef producers reported by USDA, Chicago Mercantile Exchange analysts Len Steiner and Steve Meyer reported last Thursday. Beef exports for February were up 28.3 percent from February 2009.

"That brought the year-to-date total to 311 million pounds, 24 percent higher than last year," Meyer and Steiner noted. "Shipments were higher to all major markets except Japan and South Korea."

Hong Kong increased by 6.6 million pounds, Japan exports were up 5.5 million pounds, and Canada sales rose by 4.3 million pounds.

"It was the largest year-on-year increases for February among individual countries, but ‘Other’ market (sales also) grew by 10.7 million pounds," they reported. "Mexico and Canada remain our two largest beef markets. Other countries rank third when considered as a group, just ahead of Japan."

The impact of foreign markets has been important, particularly in supporting some of the middle and end meat sales. Domestic buyers are still favoring lower-priced cuts, despite the return of some demand for the middle meats as hotel and restaurant traffic shows tentative signs of improvement. U.S. consumers, on the other hand, have been almost solely responsible for driving cull cow and bull markets to excellent levels this spring.

North Dakota State University Livestock Economist Tim Petry said last week that the increase in cow prices this spring has come despite historically higher cow slaughter.

"In general, cow prices have increased over $10 per hundredweight (cwt.) this year when a more normal increase would be $5. Prices are currently over $10/cwt. higher than last year and have been averaging a couple dollars higher than 2008, which was a record high year," he noted. "Higher prices are being supported by strong demand for hamburger and sharply lower imports of manufacturing grade beef. The ‘cheeseburger price war’ among several fast-food chains that have been promoting low-priced menu items during the economic downturn, helped demand. And after a harsher than normal winter in several regions of the country, consumers have been anxious to kick-off the grilling season. Higher prices for competing meats, including chicken and pork, have also stimulated demand for hamburger."

He said that imports of foreign beef are down nearly 25 percent so far in 2010, with the biggest declines noted in imports from Australia, New Zealand and Uruguay.

"Australia’s beef industry is in a herd rebuilding phase after several years of drought. And, ironically, there have even been reports that too much rain in places may have hampered cattle from getting to market," said Petry. "The decline in the U.S. dollar relative to currencies in those countries where we get beef has also made our market less attractive and other markets more lucrative. That is particularly the case for Uruguay."

He said that in the period ahead, cattle producers can expect prices to remain good through the summer, which typically marks a period of low supply.

"The bottom line is that prices should remain strong through the summer months until the seasonal fall decline starts in September," said Petry.

Feeder cattle

As last week wore on, feeder cattle markets began to show signs of weakness, trading mostly $1-3 lower when it became evident that cash fed cattle was softer. Vetterkind noted that feeder cattle buyers were becoming a little more cautious with their purchases.

"Obviously, with gains in the corn market (last Wednesday), along with declines in cash fed cattle and deferred live cattle futures, feedlots replacement buyers finally realized they better start procuring cheaper break-evens," he said. "These lower feeder cattle sales were the first witnessed in several weeks and would assume that this lower trend carries over into next week."

Many analysts have been wondering how much more room the market had to run and, at least in the near-term, it appears that the top may be in. For several weeks, price protection has been the phrase analysts have been batting around and producers who are able should consider taking the opportunity to protect their future marketings and manage their risk, sooner rather than later. There are many who question the stability of the U.S. economic rebound, and should that translate into a second downturn later this year, current price levels in most of the commodities could be at risk.

The video market is a way for cow/calf producers to manage some of that price exposure as prices for last week’s sale were very attractive for producers from across the country who sold calves and yearlings. Prices for the sale were reportedly $4-5 higher than the Superior Video Auction two weeks prior. For example, a lot of 550 lb. Angus crossbred weaned steers from Cordell, OK, for April delivery commanded a bid of $134.50, while a consignment of 550 lb. Angus cross weaned steer calves in Lyman, WY, for May delivery sold at $138 and a similar lot of calves from Rosebud, TX, for April delivery sold at $138.50. Yearlings offerings also sold very well with a consignment of 760 lb. Angus cross feeder steers for April delivery in Throckmorton, TX, sold at $113, while a lot of 785 lb. Angus cross feeders in Grosbeck, TX, brought $112.25 for June delivery and 835 lb. Angus cross feeders from Welch, OK, for April delivery sold at $115 last week.

Meanwhile, in auction markets, early week sales fared better than those later in the week as the fed cattle market shaped up. Last Monday in Oklahoma City, OK, feeder steers were called steady to $2 higher and feeder heifers were $1-3 higher. Stocker cattle and calves were lightly tested and steady on good demand for feeder cattle. Across town at the El Reno, OK, market last Wednesday, feeder steers were called steady to $1 lower. Feeder heifers sold steady to $3 lower while steer calves were reportedly selling steady. Heifer calves were $3-5 lower. Demand at the sale was called good, however, the quality of the run could have played a role in the price decline as there were reportedly a large number of new crop calves on offer.

In La Junta, CO, last Tuesday, steer calves sold steady to $1 higher except for those in the 650-700 lb. class which were $3-5 higher. Heifer calves were called steady to $1 higher with the exception of 500-650 lb. calves which were $2-4 higher. Yearling feeder steers sold steady to $1 higher while yearling feeder heifers were $2 higher.

On the coast in Cottonwood, CA, the feeder cattle market was called good at steady prices except for heifers over 600 lbs., which were called $2 higher than the previous week. In Famoso, CA, a good run of stocker and feeder cattle met with strong demand. Prices for all classes of cattle were called $2 higher than the previous week’s action. — WLJ

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