Grain markets add to volatility in feeder sales

Markets
Aug 6, 2010
by WLJ

The call in the fed cattle markets last week was for steady to higher cash trade once it developed, with most analysts predicting that trade would hold off until Friday. Early packer bids were at $91-92 live basis in the South and at $150 dressed in the North. However, a firming cutout and improvement in the futures trade at midweek were adding to feedlot operators’ efforts to sell at steady to higher money last week.

The boxed beef cutout turned higher despite some discounting by packers to move product into retail channels. Last Thursday, Choice boxed beef moved 20 cents higher to trade at $151.47 while Select was up 42 cents at $144.07 although movement was called light to moderate with 175 fabricated, trim and grind loads trading hands by midday last Thursday. Packers have been doing a good job selling all proteins over the past few months which has helped limit the summer price slump of years past and translated into higher livestock prices paid to consumers. Last week, pork bellies hit an all-time high and beef and poultry prices weren’t far behind.

One of the reasons for packers’ ability to increase prices has been a limited supply of proteins in cold storage. According to USDA’s June 30 cold storage report, beef supplies on hand are 14 percent lower than they were on the same date in 2009. Beef in cold storage was at its lowest level since 2005, according to the report. Pork supplies were down 29 percent from last year. Only poultry supplies showed an increase, rising just 2 percent from last year’s levels, some of which is likely due to ongoing trade negotiations over sanitary poultry rinses with Russia and other historically large buyers of U.S. poultry. The net effect in the overall decline in protein availability has been to allow packers to boost prices and prevent the normal seasonal summer downturn in live animal prices.

That limited downturn in prices has also helped the feedlot sector stay very current in its summer marketings. Over the past several summers, the price structure in the futures market has encouraged cattle feeders to delay summer marketings in favor of the premiums available in the October live cattle contract. Because the premium structure is more muted this summer, preventing the formation of a backlog of cattle, the summer low has likely been put in and prices appear set to rise. Similarly, those dynamics have also helped to hold down carcass weights, requiring larger purchases of cattle by packers looking to fulfill orders, adding further strength to prices. For the week-ending July 30, USDA reported dressed weights averaged 772 lbs., an increase of 2 lbs. from the prior week but a full 14 lbs. lighter than average for the same week in 2009. Likewise, live weights were also sharply lower than a year earlier, averaging 1,272 lbs. for the week ending July 30 versus 1,288 lbs. for the same week last year. The result has been an uptick in production numbers required by packers as demand, particularly from overseas markets, has improved. Harvest for the week through July 30 was reported at 654,000 head compared to 639,000 head a year earlier when carcasses were heavier and demand was lower due to macro economic circumstances in the U.S. and abroad.

Feeder cattle

The strength in fed cattle markets didn’t translate over into feeder cattle sales last week. Instead, the grain markets took a toll and kept prices muted. Reports of drought in Russia and portions of Europe have caused concern in the grain trade and last Thursday, producers in the U.S. awoke to news that Russian officials had banned grain export sales for the Aug. 15-Dec. 31 time period in an effort to keep grain stocks up until the 2010 crop can be assessed.

The announcement had an immediate impact on U.S. grain prices, with wheat prices trading sharply higher at midday last Thursday. Spot month September wheat prices were 60 cents/bushel higher at $7.85 per bushel. The clear implication of the Russian announcement is that less wheat will be used in feed rations this winter and instead it will be replaced by corn, particularly in the southern Plains, which will drive up corn use. That had a spillover effect on corn prices last week, pushing the spot month September 8 cents/bushel higher to $4.05/bushel. New crop December corn contracts rose 7.5 cents/bushel to hit $4.22/bushel.

The increase in grain prices will help move fed cattle prices higher, however, in the near-term, it will also suppress feeder cattle prices until those higher live cattle prices have the opportunity to pass through the production chain to cow/calf producers. If grain market volatility continues, as appears likely after the Russian announcement, it is likely to increase volatility in feeder cattle prices going into the fall as costs of gain increase for cattle feeders.

Last week, the grain prices weighed on feeder cattle contracts traded on the Chicago Mercantile Exchange. The August contract moved 57 points lower on Thursday to trade at $113.02 while September was down 67 points at the close at $113.25 and October lost 107 points to finish the trading day at $113.80.

The other factor playing a role in the market last week was continued high heat indexes in the central Plains. Portions of Kansas last week recorded heat index numbers at or near 110 degrees, which was taking a toll on feedlot operators and cow/calf operations alike. Anecdotal reports coming from Kansas operations indicate the grass is becoming increasingly dry and auction market receipts seem to bear this out in the form of growing numbers heading to market. However, despite the heat, sale prices were widely mixed last week, with some classes of cattle, particularly long-weaned offerings, seeing better prices than those offered the prior week. For example, in Dodge City, KS, last week, steers in the 700-800 lb. class were firm to $1 higher while those in the 800-900 lb. category were weak to $1.50 lower. Heifers from 600 to 900 lbs. were called weak to $2 lower. Steers 700 lbs. and under and heifers 600 lbs. and under reportedly sold firm to $3 higher than the previous week on a large offering of cattle that was more than 4,000 head higher than the same date last year.

In Oklahoma City, OK, feeder steers were called steady to $1 lower than the previous sale. Feeder heifers were called steady to $2 lower and steer and heifer calves sold $2-5 lower. Sale reports indicated that fleshy unweaned calves at the market were fully discounted by buyers as a result of the same heat conditions which were reported in Kansas. Demand at the sale was called moderate to good for feeder cattle and moderate for calves.

Farther west in La Junta, CO, a slight uptick in receipts from recent weeks was also noted. Lightweight steer calves were called $2-5 higher in a range of $125-140 while heavier weights were steady from $115-128. Lightweight heifer calves were $2-4 higher at the sale from $107-120 and heavier classes were $2-4 higher from $105-118.

On the coast in Cottonwood, CA, stocker and feeder cattle were called mostly steady with heifers over 550 lbs. selling $2-4 higher than the previous week.

Farther north in Vale, OR, feeder cattle prices were called steady on a light test with steers in the 500-600 lb. range selling from $107 to $119 and yearling steers in the 700-800 lb. class bringing $96-106. Heifers in similar weight classes were called $2-7 back. — WLJ

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