Prices trade steady to lower after prior week’s big jump

Markets
Aug 27, 2010
by WLJ

Fed cattle traded early last week with the market mostly 50 cents to $1 lower in all feeding areas. Last Tuesday in the southern Plains, live cattle traded at mostly $99.50 with dressed sales in Kansas reported at $157. In the North, early fed cattle trade came at $155 dressed, steady with the prior week, while live cattle sold from $99 to $99.50. Corn Belt trade occurred at $154-156, although the early trade volume was light.

Last week’s action was likely to lead to lower money again the following week until packers and retailers have a handle on beef clearance levels over the Labor Day holiday. Much of the retail needs had been met last week aside from a little-last minute buying and, with a shorter production week after the holiday and a slowdown in retail sales, the next couple of weeks could see steady to slightly lower fed cattle prices according to analysts. However, the demand from retailers ahead of the holiday was said to be strong and boxed beef prices managed to post gains for much of the past week. Last Thursday, at mid-day, Choice boxed beef was trading at $164.56, up 31 cents from the previous day while Select was up 72 cents at $158.54 on light trade volume.

Retail and export market demand has shown signs of improvement toward the second half of summer and packers have been able to use this upswing to boost prices. However, little, if any, of that increase has been passed along to consumers. A number of reports last week pointed to the likelihood of more-moderate-than-expected food price inflation and concerns about the possibility of deflation continue to persist in the market. Last week, USDA revised its official forecast for food-price inflation down from 1.5-2.5 percent to a level of .5-1.5 percent for 2010. If the lower expectation level is met, it would be the lowest level of food-price inflation in the U.S. since 1992. The jump in protein prices, particularly in the beef markets in recent weeks have largely been absorbed by retailers who are reluctant to pass along increases to price-conscious consumers for fear of losing their business to other retailers. This has cut into margins of food manufacturers and retailers across the board over the past several months.

Analysts are predicting that, sooner or later, price increases for commodity products will have to be passed on to the consumer and some manufacturers are watching to see if recent increases in wheat and other grains, along with protein prices, continue to rise before they make a decision. Consumers have shown little willingness to accept higher prices, which is creating a good deal of margin pressure across the production chain. With USDA revising price expectations lower, it might make it difficult for producers to move prices higher from already very good levels.

Some of that information was likely priced into last week’s trade action and Chicago Mercantile Exchange (CME) analyst Troy Vetterkind, of Vetterkind Cattle Brokerage, noted last week that futures markets were supportive of the cash trade going forward, which was likely to limit any price breaks to the downside in the near-term through at least Labor Day.

"As has been the case though for the last several weeks, funds are under the market to support any type of break and this kept both live and, in particular, feeder cattle futures from falling any further going into the close (on Aug. 25)," Vetterkind noted. "Open interest went up in both live and feeder cattle yesterday. So it’s going to be a choppy trade for the balance of the week. The market won’t rally and it won’t break hard and this is likely going to be the case again today until some sort of fresh fundamental news or outside market influence sparks a move in the cattle trade."

He said that for last week there would be a strong price resistance at $99.50-100 on the CME’s October live cattle contract. Any close above that level would cause the October live cattle contract to go to the $103-level.

"To be 100 percent truthful, this feels like what the market wants to do before having a meaningful correction lower. And I say this while trying to be lightly short the market because I think we are going to see the cash markets break past Labor Day," said Vetterkind. "But the fact of the matter is that the futures simply won’t break, so you need to be careful trying to pick a top in this market, because there is nothing to indicate that one is in yet."

However, he said the market does seem to be losing its bullish momentum after hitting the $100 level on the October live cattle contract.

"However, that can change in 15 minutes," he said. "On the downside, if we were to get a minor near-term break, I think we would find very good near-term support in October live at $97.50-$98"

He said it would take consecutive closes on the CME to possibly indicate the market is tired, in which case an extended break would move the market lower to the $95.50-96 level for the October live cattle contract.

Feeder cattle

Vetterkind noted a similar supportive set-up in the CME October feeder cattle contract which should help support cash prices. He said that near-term resistance in the October feeder cattle contract exists at $118, with any close above that level allowing the contract to move to the $120 level. A near-term break in feeder cattle contract trade would find strong support at $116 for the October contract and, according to Vetterkind, if that level were violated, an extended break could take the market to $113 for the October contract.

However, it appeared that it would take a significant shift to push the market that low last week as pressure from the grain markets eased and temperatures broke lower in most areas, improving the cash feeder cattle markets across the country. Most markets reported prices were $1-3 higher last week. Numbers of feeder cattle in most markets are still light as the fall runs are still a few weeks off and could be delayed even longer with many areas still reporting good pasture and range conditions. Similarly, stored feed supplies are also good and some producers are expected to hold calves back, either for retention purposes or for sale as yearlings, as that market remains very strong on high demand.

Last week in Oklahoma City, OK, feeder steers and heifers sold steady to $3 higher. Steer calves were called $2-5 higher while heifer calves were steady to $2 higher with good demand reported from most classes of cattle on offer.

To the northwest, in Phillip, SD, where numbers are beginning to increase slightly, feeder steers sold mostly $1-2 higher last Tuesday although heifer numbers were still too light for an accurate comparison, although a higher undertone was noted from the previous week’s sale on good demand from buyers. And, in Billings, MT, although numbers were still on the light side, feeder cattle sales were reportedly steady to $1 higher than the previous week where a trend was available.

On the West Coast, in Davenport, WA, feeder cattle trade was called active on good demand and prices were said to be steady on a light market test. To the south, in Vale, OR, feeder cattle sold steady on a light test of all classes and in Cottonwood, CA, an extremely active market with great demand pushed feeder cattle under 700 lbs. $2-7 higher while heavier weight yearling cattle sold steady to $2 higher. — WLJ

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