Futures market helps cash fed cattle prices

Jul 23, 2010
by WLJ

Fed cattle trade last Thursday started $1 higher than the previous week’s action on the back of improvement in the futures markets and steady boxed beef prices. In Kansas, trade developed at $95 live on Thursday while early sales in the Corn Belt were in a range of $148-151, although volumes were too light to call a trend for the week in the North.

The futures market has been instrumental in driving cash prices above analysts’ expectations over the past couple of weeks, a trend the could continue for the near-term, according to Vetterkind Cattle Brokerage analyst Troy Vetterkind.

"It’s all about the funds right now and their reallocation of new money into the cattle futures trade," he said last week. "This is going to be the supporting factor to the cash trade and can likely take the market higher than many of us think it should be. Right now, the path of least resistance is higher, so I suppose you have to go with that. Look for live cattle futures to make a test of contract highs of $95-$95.50 in August live and $96-$97 in October live."

Last Wednesday, the amount of money rolling into the market was apparent, with open interest rising 4,300 contracts to reach a level above 327,000 contracts as funds buy up long contracts, which will, in turn, help feedlots press for higher cash prices ahead.

One of the factors spurring commodity funds into the long side of the cattle markets is the concern over inventory and supply, according to Vetterkind, who was eyeing two important USDA reports due out last Friday as a catalyst for market movement. The Cattle on Feed report is expected to show that the industry will have some inventory to work through during the early fall and winter periods, due to the increase in summer placements, according to Vetterkind. However, he noted that shouldn’t serve to limit price increases during the fourth quarter.

"Given the fact we are very current right now and continue to pull cattle forward means that the market likely won’t fall apart during this time frame," he noted. "And, overriding the increased feedlot supplies will be the semi-annual cattle inventory report. The report is expected to show all cattle and calves at 98.8 percent (of last year), calf crop at 98.9 percent (of 2009), all cows at 98.6 percent."

He pointed out that there is also a drop in the expected number of heifers which are being held back, with nearly a 2.1 percent decline in beef replacement heifers expected. Cow liquidation is also expected to continue, with a 1.4 percent decline from last year’s level.

"So, even though we have growing feedlots supplies ahead of us, total cattle numbers continue to decline, which has the market on edge in terms of inventory for 2011/2012," said Vetterkind.

Feeder cattle

The tight supply of feeder cattle was also expected to be apparent when USDA reported inventory numbers last Friday. The annual calf crop number was expected to be 1.1 percent lower than last year’s level, with some market analysts predicting a number which may be as much as 1.7 percent behind last year’s figure. DTN analyst and order buyer Walt Hackney said last week that the tight feeder supply is already being felt by the market and buyer interest has been aggressive as higher cash fed cattle prices translate into an improving feeder cattle market. He noted that the futures market, which has followed fed cattle higher, is encouraging some feeder cattle hedgers to protect their prices with fall hedges. Likewise, some are locking in profits with cash fed cattle contracts to packers based on the October contract.

"There is some early selling off grass as some cattlemen forfeit the prospects of extra grass gains and sell early, taking advantage of the red hot feeder prices. Those producers who are involved with this early movement are obviously looking at excellent profits and are taking the early profits rather than gamble on the end of summer prices," Hackney noted last week.

He said western calf contracting is about 80 percent complete.

"The next market on calves will begin to occur by mid to latter August on cash calves for immediate delivery," said Hackney.

Despite the heat in some parts of the country, particularly in the central and southern Plains last week, cash auction market prices were reportedly good, with many markets reporting sales that were steady to higher than the prior week. For example, in El Reno, OK, last week, feeder steers were called steady to $2 higher. Feeder heifers were reportedly $1-2 lower while steer calves sold steady to $2 lower and heifer calves were called steady to $2 higher on active trade and good demand.

On the West Coast in Cottonwood, CA, steers under 700 lbs. and heifers under 600 lbs. sold mostly steady last week; heavier weight classes were called $2 lower than the prior week. And in Madera, CA, prices for stocker and feeder cattle were reportedly steady to $5 higher last week. — WLJ

Packers have managed to steady the boxed beef cutout values over the past month in a very narrow range, which has helped them protect positive margins. Much of the demand in the market right now is coming from two particular sectors, the grinding sector, which has been using some end cuts in grinding formulations, and the export market, which is adding strength to those same end cuts and to some middle meats. Last week, packer margins were estimated by HedgersEdge.com at $15.25 per head. The Choice boxed beef cutout was reported by USDA at $155.28, down 24 cents from the prior afternoon, at midday last Thursday, while Select was slightly higher at $146.30 on light to moderate trade volume.

Whether packers will be able to protect those margins for long remains to be seen. Cattle prices appear to be moving higher and buyers, particularly at the domestic retail level, appear to be resisting price advances. Retailers have been unable or unwilling to pass along price advances to consumers, who have yet to recover from the economic downturn. Even Safeway, a large buyer of beef, noted last week that it sees price deflation ahead when the company reported earnings last week. Safeway’s CEO, Steve Burd, said last week during the company’s earnings conference call with analysts and reporters that the company continues to see a decline in price per item, a trend the company does not expect to see reversing until the fourth quarter of 2010.

"As a result, we have lowered our expectations for the balance of the year," said Burd.

How that trend toward declining consumer spending will impact the cattle markets is unclear in the short-term. However, there are a number of positive factors which should help limit the impact. Feedlots are very current in their marketings and the Cattle on Feed report, due out last Friday, was expected to show June marketings were nearly 2 percent above a year ago. This, coupled with the tight supply of replacement feeder cattle, has helped maintain the positive outlook for fed cattle prices at a time when, seasonally, prices are usually showing some signs of weakness. On another positive note, the market conditions in both the cash and contract markets are such that the industry isn’t likely to develop a backlog of cattle in late summer as has occurred in the past few years as feeders delayed marketings to hit high fall contract prices, which has limited late-third and fourth quarter price advances.