Outside markets spill into early cattle trade

Markets
Apr 30, 2010
by WLJ

Outside markets took their toll on the fed cattle trade last week with a downdraft on Wall Street pulling live cattle contracts and cash lower on Tuesday. The sharply lower action in the equity markets forced commodities lower and cattle feeders jumped into the market to sell cattle at $98-98.50, generally 50 cents to $1 lower than the previous week’s action. Analysts noted that many of the cattle sold early last week were hedged cattle that were making money for the feedlots, even on the week’s lower prices. Dressed trade in the North was also lower, with most of the week’s volume changing hands at $157.

There is some concern among industry analysts that another financial crisis may be brewing and consumers, who are slowly emerging from their spending hibernation, could quickly rein in their spending habits if Wall Street stumbles yet again this spring or summer. Among the uncertainties faced by the market is the rising cost of gas as the U.S. eases into the summer driving season. It was rising prices, particularly for gas, that helped push the U.S. into recession in the first place and another run at $100 per barrel oil could easily impact consumers’ willingness to spend on discretionary items, such as beef, this summer.

Last week, cutout values stood firm, with a possible increase still in the picture until Memorial Day ordering is complete. However, the load count has been light at current price levels. Last Thursday, midday Choice price stood at $170.08, up 31 cents from the prior afternoon’s trade, while Select was down 12 cents at $167.34. Volume was light at 112 loads of fabricated and trim and grind cuts. It appears that packers are likely to begin discounting product for the domestic market rather than attempting to keep prices high on light movement after the holiday buying is complete, according to market analyst Troy Vetterkind. He said he expects prices to begin to turn lower in the boxed beef markets in the near-term, which will translate to lower fed cattle prices into the second half of May.

"Fed cattle supplies will remain very manageable and packer demand for cattle will remain strong as they take advantage of very good processing margins," he commented. "But, futures look pretty tough technically after Tuesday’s trade and the boxed beef market feels like it could be lower also, so unless either of the two latter situations correct themselves, cash markets are likely to stay on the defensive."

He said middle meats, particularly ribeyes and short loins, have been a primary driver of the recent increase in the boxed beef markets, which has helped push Choice prices over the $170 mark for the first time in quite awhile. However, those middle cuts are beginning to slip back in the market place.

"If we are to begin to see a lower trend develop on these items, Choice/Select cutout values are going to have a hard time holding the $1.67-$1.70 price level," said Vetterkind.

He noted that the market for chuck and round products also moved lower last week as demand for product from ground beef processors slipped. If grinders—who have been supporting the market through purchases of end products—pull back, it could also add pressure to cutout prices, Vetterkind noted last week.

"The ground and processing beef markets were all higher again (last Wednesday). The 50 percent fed cattle trim printed an all time high yesterday at a weighted average price of $1.06, and 90 percent boneless cow beef is approaching all time highs of $1.84 set back in July 2008 with yesterday’s weighted average price of $1.71," he pointed out. "Historically, both these markets top out for the spring during the end of April/first of May, however, given continued tight cow supplies and sharply lower fed cattle carcass weights, we likely don’t see either of these markets break very hard until we see more beef imports."

Vetterkind explained that there is a lot of talk around the marketplace that Australia and New Zealand cow slaughter is expected to pick up in the next 30 days, which will have extra imported supplies of processing beef hitting U.S. ports by the end of May.

"Time will tell if this holds true or not," he said. "In all, beef supplies still remain relatively tight given reduced imports, increased exports, and lower beef domestic beef production. This will keep cutout values from falling out of bed, however, packers may have an increasingly hard time pushing beef prices very much higher and would look for boxed beef values to drift lower into next week.

Feeder cattle

Any weakness in the fed cattle markets could quickly spill over into the sky-high feeder cattle markets, but as of last week, it didn’t appear to have much of an affect on cash sales, with most markets reporting prices $1-2 higher than the previous week. Even the contract markets held up relatively well following the week’s softer tone in the live cattle pricing. Vetterkind pointed to the relatively cheap costs of grain as reason for some of the support in the feeder cattle markets. Additionally, the widespread availability of green grass and moisture-damaged corn in many areas has kept buyers in the market for the tight supply of feeder and stocker cattle this spring.

"That said though, if we continue to see further losses in deferred live cattle futures next week, cash feeder cattle markets are going to have a hard time holding recent gains, in my opinion," Vetterkind cautioned.

Prices this spring have already put cow/calf producers in the black in many cases, according to Livestock Marketing Information Center (LMIC) analysts, which have been updating price forecasts for the fall market to include several shifting market factors including higher fed cattle prices.

"For most cow/calf producers, higher calf prices will mostly translate directly to the bottom line profit as costs of production will largely remain in check for the balance of 2010. A significant rebound in cow/calf returns in 2010 will set the stage for stabilizing the size of the U.S. beef cowherd, especially in 2011," LMIC analysts reported last week.

The updates for a typical southern Plains cow/calf operation are calculated as cash returns over all cash costs plus pasture rent. The recent increase in expected prices for fall heifer and steer prices are above LMIC’s previous forecast.

"For 2008 and 2009, on a per cow basis, the estimated cash returns were in the red (about -$18 per cow in 2008 and -$34 in 2009). Earlier forecasts were for returns to return into the black for 2010," LMIC analysts stated. "The recent update put the estimated cash return for 2010 at just over $50 per cow, an increase of about $20 compared to estimates made earlier this year. If realized, 2010 cow/calf returns will be the highest since at least 2006."

Early estimates for 2011 cash returns are similar to those expected in 2010.

"Calf prices are forecast to increase next year, but costs of production also are forecast to rise. So, in terms of profitability, increased prices in 2011 may be largely offset by higher costs such as interest, feedstuffs, annualized bull costs, etc.," said LMIC. "If producers see cow/calf returns in their bank accounts at the currently expected levels in 2010 and 2011, the erosion in U.S. beef cow numbers will first stabilize and then will begin to grow."

The heifer retention numbers will be a key statistic, as will herd inventory numbers as the industry begins to consider the expansion phase of this rather elongated cattle cycle.

Last week in cash markets, prices were generally higher, with most auctions reporting prices $1-2 better than the prior week’s trade. In El Reno, OK, last week, feeder steers and heifers sold steady to $1 higher. Steer and heifer calves were called steady to $2 higher on a light test with good demand for all classes of cattle noted. Prices to the west in La Junta, CO, were mostly steady on a light run of cattle. Light steer calves were sold steady between $125 and $146 while heavier weights brought a spread of $125-149, steady with the previous sale. Light heifer calves were steady from $115-123, with heavier weights bringing $112.50 to $126.

Farther north in Bassett, NE, steers traded steady to as much as $9 higher for 550 to 580 lb. offerings compared to the sale two weeks earlier. Heifers traded steady to $2 higher on good demand and active trade.

On the West Coast in Famoso, CA, the sale last week saw good demand on stocker cattle, particularly the greener kinds, which sold steady with the previous week. Feeder steers and heifers were called $2 higher, with the best demand noted on the lighter weights suitable for grass. The market in Galt, CA, was steady on all classes and weights of cattle with the 500-600 lb. steers selling in a range of $110-130 while heifermates sold $5-9 back. Heavier 700-800 lb. steers sold between $95 and $114 with heifers in the same class bringing $90-105.

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