Outside markets add to cattle price volatility

May 21, 2010
by WLJ

Outside markets took their toll on the beef business last week. A seasonal turn in cattle demand had feeders selling hedged cattle last week at sharply lower prices. Trade in the South was reported for the week at $96 live basis down $3-4 from the prior week’s action. In the northern tier, dressed trade came at $155-157 last week, off $5-7 from the previous week, while live trade in the North was reported $3-4 lower at $96-97.

Erosion in the equity markets resulted in a drop in confidence which rippled through commodities last week with mostly lower trade in live cattle contracts for the week and a decline in boxed beef values as buyers worried about the impact on consumers and the retail sector. Last Thursday, Choice boxed beef was trading down to $167.86 while Select was also trading lower than the previous day at $162.74 on very light movement. Those levels are $2 lower than the previous week. Analysts were cautioning last week that further declines in the boxed beef market are likely, and could be greater than expected if volatility in outside markets continues or worsens in the weeks ahead as seasonal demand slumps. For the week ahead, analyst Troy Vetterkind, of Vetterkind Cattle Brokerage, said he expects additional downtrend in the market.

"I would say right now that we are going to be at least another $1-2 lower at $94-95 live/$152-154 dressed," he said.

That downward pressure, coupled with the negative sentiment in the equity markets has the contract trade on edge, Vetterkind reported last week. He said the long hedge fund positions are quickly being liquidated on the Chicago Mercantile Exchange (CME).

"Open interest keeps going down every day and every intra-day rally in the futures is met with big offers to sell out of longs. I thought we could rally a little bit towards the end of the week to narrow up some of this strong basis," he said. "However, this now seems like this is going to be hard to do, as cash is going to keep falling into next week and the Dow and S&P can not hold any kind of a rally and are going to keep dragging cattle futures lower with them."

He said the contract markets are leading cash prices lower for the time being and any rallies in the contract trade would be viewed as selling opportunities.

"Hedgers who haven’t done anything yet, you’re better off buying put options on expected production now, as there is no sense selling futures that carry so much discount to cash," Vetterkind said. "Spec traders should be picking their intra-day resistance points and selling small rallies. If fading extreme breaks in the market, you probably better have some puts on to protect. Keep an eye on the outside markets for market direction."

Vetterkind predicted that beef markets will also continue to succumb to downward pressure.

"Markets for rib/loin meat and fed cattle trimmings now carry a fully lower undertone and, along with steady at best markets on chuck and round meatm continues to drag cutouts lower," Vetterkind said last Thursday. "Beef markets are likely to remain under pressure until after Memorial Day as everyone is bought up going into the holiday and we will now have to wait and see how well beef moves over the holiday compared to other proteins to see how much fill-in business is required. Continue to look for lower boxed beef markets for the balance of this week and next."

Packers were working to take advantage of positive margins while they existed last week. Production through Thursday was reported at 520,000 head, up 2,000 from the previous week and 3,000 ahead of the same period in 2009. Production for the week was expected to hit the 670,000 head level, a solid number for the industry which continues to see better than anticipated demand from both the consumer and export markets.

Last week, export markets saw net sales rise 24 percent from the prior week to hit 15,700 metric tons. Japanese buyers increased their purchases to hit 7,100 metric tons, while Mexico’s buying increased to 2,400 metric tons and Vietnam hit 1,900 metric tons. Exports of 12,500 metric tons, a marketing-year high, were up 9 percent from the previous week and 16 percent from the prior four-week average, according to Vetterkind.

Feeder cattle

The volatility in the fed cattle markets spilled over into feeder cattle markets last week as well, although not to the extent that it could have. Prices in most auction markets were mostly mixed with some classes of cattle still seeing higher bids, although later-week sales were reportedly a little softer in some parts of the country. Focus has started to shift to fall marketings with most of the big runs of fall calves accounted for now. Analysts have noted in recent weeks that fall marketings should be price-protected to help manage some of the volatility in the markets. A number of outside factors, from corn prices to swings in the stock market, will determine the direction of cattle markets going forward this summer and the pressure could take a negative toll on feeder cattle prices for producers who aren’t protected. Last Thursday, with the Dow Jones Industrial Average trading down more than 250 points, feeder cattle prices were showing triple-digit losses. The May contract dropped 150 points during the session to hit 108.85, while August lost 192 points to settle at $110.65, the September contract lost 175 points to finish the day at $110.50 and October dropped 205 points to end the day at $110.20. Analysts have said that the early summer video sales and puts on the fall contracts offer good opportunities to protect fall prices for calves and yearlings.

Last week in auction markets, as noted, prices were mixed. In Oklahoma City, OK, feeder steers sold $1-4 lower. Feeder heifers were $1-3 lower, while steer and heifer calves sold steady on a very light test although demand was called moderate to good for feeder cattle. In Joplin, MO, feeder cattle and calves sold steady to $2 lower. Spots of weakness were noted throughout the light offering, with the exception of top quality 500 lb. steers which were fully steady. Buyers with precise orders were still just as active during the sale last week according to auction market reports, but bidders who were merely accumulating numbers around the edges were more conservative than in recent weeks.

Farther west, in La Junta, CO, last week, light steer calves were called steady to $2-3 higher from $125 to $141, while heavier weights were $2 higher from $118-133. Lightweight heifer calves were steady with the prior week from $110 to $129. Heavy heifer calves were steady from $110-122. To the west, in Famoso, CA, last week, the demand for cattle to turn out on the region’s abundant grass continued. Cattle suitable for grazing programs sold steady on all classes while feeder cattle sold mostly $2 lower than the prior week. — WLJ