Market slumps on lighter demand

Markets
Jun 11, 2010
by WLJ

A sagging boxed beef cutout, lower production levels and a slump in exports all combined last week to push live and dressed cattle prices lower. The early trade for the week was reported in the southern Plains at $92-93, down $2 from the previous week’s trade. Dressed trade fell $4-5 last week, with most of the northern tier trading cattle at the $150 level.

Boxed beef prices were heavily discounted early last week with packers working hard to move some volume. The effort paid off last Wednesday with nearly 400 loads trading hands, although it took steep cuts in price to make it happen. At midday, the Choice product was trading at $155.51 last Thursday, down $1.30 from the prior day, while Select was off $1.25 at $147.01.

According to analyst Troy Vetterkind at Vetterkind Cattle Brokerage, packers were reducing production plans last week in an effort to throw a little support under product values. He predicted harvest would hit 675,000 head for the week, well below the previous week’s pace.

"Weakness continues to permeate throughout the chuck and round complex of the beef carcass. But with the sharply lower offering levels last Wednesday came a sharp increase in trading volumes of choice shoulder clods, inside rounds, and select chuck rolls," Vetterkind noted. "This, along with cutbacks in production schedules, should help to keep inventories of these items cleared for the balance of the week. In the middle meat complex, choice ribs held mostly steady, however, select ribs and choice/select loin items remained under a moderate degree of pressure."

He said he also expected moderate price pressure to keep ground beef and cow beef moving lower, although Vetterkind said there was some likelihood that production cuts could help stabilize prices in the near term, translating into steady fed cattle prices for the week ahead.

Export markets, which in recent weeks have drawn a good deal of analyst attention, sagged last week, according to USDA. For the prior week, the agency reported sales were down 19 percent from the prior week. Sales were down 53 percent from the four-week average, which bodes poorly for the prospect of increasing prices in the near future without a rapid turnaround.

However, despite the drop in exports, beef production is expected to remain manageable for the remainder of the year which will help to keep a floor under prices this summer. According to USDA’s monthly World Agricultural Supply and Demand Estimate (WASDE), beef production in the U.S. is expected to fall 185 million pounds from last year’s levels due to a drastic reduction in carcass weights to date in 2010. Similarly, reduced cattle slaughter this year will also keep a lid on production as supplies of market-ready cattle remain tight into the end of the year. This later point has become worrisome for many market economists who have yet to see any signs that the cattle cycle will turn around toward an expansion phase in 2010. This will keep prices for feeder cattle high and will require packers to continue to scramble to secure fed cattle in the marketplace.

According to the WASDE report, the U.S., in an effort to meet production needs, will increase imports of foreign beef for the year by 13 million pounds. Exports are expected to decline by 2 million pounds from prior month expectations to reach 2.06 billion pounds this year. However, that number still represents a significant increase from last year’s total export number, which was reported at 1.87 billion pounds. If exports continue as expected, 2010 sales will exceed 2009 levels by 189 million pounds. The WASDE report showed no change in expectations for 2011, with total production expected to reach 25.22 billion pounds, while imports are predicted at 2.79 billion pounds. Exports are expected to fall slightly to 2 billion pounds next year.

In addition to the beef numbers, USDA also lowered 2010 pork production expectations, dropping the number by 115 million pounds to reach a production level of 22.14 billion pounds. Poultry production expectations for 2010 were raised slightly by USDA.

Feeder cattle

Feeder cattle markets were widely mixed last week with early markets reporting mostly steady to $2 lower, while later sales reported prices mostly steady to $2 higher after futures markets managed to rally slightly at midweek. Market numbers are falling steadily and many auction markets are putting their summer schedules in place in an effort to pool available numbers of cattle, USDA market analyst Corbett Wall noted last week.

"Available numbers of calves and yearlings have turned extremely tight after running well ahead of 2009 year-to-date receipts. This year’s Memorial holiday week auction headcounts were over 27 percent lighter than last year’s corresponding holiday week, he reported. "Producers have pulled cattle forward to meet impressive price levels and the feeder cattle well has run dry. Money could bring these cattle back out of the bushes, but it will likely take a market that is at least as lofty as early May—otherwise, sellers will just hold on to the cattle until late summer and take advantage of cheap pasture gains."

He said that corn growers in many Midwest markets are already stocking up on available feeder cattle to the extent that in many cases, farmer-feeders have outnumbered order buyers at those sales. Growing conditions in most of the country have been extremely favorable for the past several weeks and crop progress is well ahead of normal. As a result, corn prices have been under pressure. That pressure, combined with expectations of a possible record crop, may lead to increasing numbers of cattle in feed in small feedlots in the Midwest and eastern Corn Belt, so the current buying by farmer-feeders could be an early indicator of those intentions.

According to Chicago Mercantile Exchange analysts Len Steiner and Steve Meyer, there has been an ongoing shift in cattle on feed numbers over the past two years which shows that the move toward Corn Belt and northern feeding states continues. They pointed out that cattle on feed numbers in Iowa rose from an average of approximately 300,000 head in the mid-1990s to 610,000 head in March 2010. Similarly, the number of cattle on feed in South Dakota also doubled in the same time period.

"USDA has not published state-level data for Minnesota or Illinois since 1993 but the resurgence of cattle feeding in Iowa and South Dakota suggests that they perhaps should consider doing so once again, especially for Minnesota," Steiner and Meyer said last week.

They pointed out that there has been a significant increase in the share of total cattle on feed numbers reported in the Corn Belt lots as cheaper overall cost of gain drives more cattle numbers north. The increasing share of cattle being fed in the north corresponds closely with the increase in ethanol production in the Corn Belt since 2006, a trend that is likely to continue as more plants come online in the region.

Steiner and Meyer posed the question of whether the trend indicates that cattle feeding is merely growing in the North with new bunk space coming on line there or whether there is a shifting of capacity out of the southern Plains back to the Corn Belt.

"We are firmly in the ‘growing’ camp for two main reasons. First, higher Corn Belt cattle numbers will eventually run into slaughter capacity issues. Iowa has only two cattle slaughter plants, and one is very small. South Dakota has none of any size and there is not likely a lot of slack capacity in Nebraska’s big seven plants. There is still slack capacity in the national beef slaughter sector, so it is very unlikely that a new plant will be added until that slack is rationalized," the pair said.

They also noted that it was weather, not cheap feed costs which shifted cattle feeding capacity to the southern Plains in the first place, an advantage that Steiner and Meyer noted still exists.

"Cheaper feed will no doubt lessen the advantage but will not offset it entirely," the pair stated. "We look for Corn Belt feeding to continue to grow in both numbers and share. That shift may impact the seasonal patterns of production and prices but appears to be having little effect so far."

In auction market action last week in Oklahoma City, OK, feeder steers and heifers were called $2-4 lower, except steers over 850 lbs. which sold steady. Steer calves were also steady, while heifer calves were $1-3 lower. Demand was reportedly moderate to good for feeders and good for calves. Meanwhile in West Plains, MO, steers and heifers were called steady to $2 higher, with several spots of $3-4 higher on 300-450 lb. calves. Supply was called moderate with improved quality and better numbers, which prompted better buyer demand.

Farther west, cattle numbers are beginning to show signs of increasing slightly as cattle begin to make their way off grass and into town, although it is still too early to call the start of the run, with good grazing conditions still being reported in many areas. In Prescott, AZ, steer and heifer calves sold well last week, with prices rising $6-10 from the previous week’s level while yearlings were called $6-8 higher. In Cottonwood, CA, the supply of cattle under 500 lbs. was reportedly too light for a market test, although the overall market was called steady for feeder cattle. Farther north in Vale, OR, the market was improved last week with good demand and test on 400-550 lb. offerings suitable for grazing. Steers in the 300-400 lb. class brought a range of $124-141 while 400-500 lb. steers sold between $126 and $138; heifermates sold mostly $7-9 back. — WLJ

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