Fed market trades lower, boxed beef slides

Oct 8, 2010
by WLJ

Fed cattle traded Wednesday last week at prices mostly $2-3 lower than the previous week’s action. In Kansas, live trade was in the range of $94-95 while in Nebraska and the Corn Belt, dressed trade was reported at $149-152, with the bulk of the action at $150. Much the week’s decline was the result of a slow erosion in beef cutout values, which have pushed packer margins into the red. Choice boxed beef last Thursday declined 5 cents to $152.58, while Select was down 81 cents, trading at $144.72, with moderate trade and demand.

The decline has cut into packer profitability and there was talk last week of packers cutting into production schedules in an effort to put some support under product prices. HedgersEdge.com estimated packer margins at negative $30.85 per head last Thursday with production expected to hit 650,000 head for the week, 6,000 fewer than the prior week’s total harvest.

Despite the drop in beef cutout values, prices have managed to maintain fairly solid levels in recent weeks as the export market has managed to pick up some of the slack demand in domestic sales. As a result, analyst Troy Vetterkind of Vetterkind Cattle Brokerage said he thinks the fed cattle market is getting close to a near-term low.

"If it didn’t take place this week at $95, then it probably takes place next week at $94," he said. "Weekly beef production levels will slowly decline going into November-December, domestic beef demand will pick up as the retail guys begin to get product lined up ahead of end of year celebrations, export demand will remain robust, and imports will continue to run well below year ago levels."

Vetterkind said he expected those market fundamentals to provide a good bounce going into the end of the year.

"This likely moves the cash fed cattle trade back up to the upper $90s lower $100s before Christmas," said Vetterkind.

Likewise, he predicted that the recent declines in some of the middle and higher-valued end cuts were likely to spur buying interest, which should place a floor under cutout values soon.

"This doesn’t mean that we go straight back to a $1.60 choice cutout, but it probably means that given the level of demand for end meats and ribs, that we can hold the choice cutout at the $1.50 mark," said Vetterkind. "Look for a steadier tone to develop in the boxed beef market by the first of next week."

There has been a good deal of speculation about the direction of the U.S. economy developing over the past several weeks, with many economists predicting a second slow down ahead. If those predictions are correct, it could take a toll on beef prices and limit upside advance as U.S. consumers once again cut into their discretionary spending. However, that likelihood may be muted by two factors which have provided significant support to the market. Beef and cattle supplies remain historically tight, limiting the backlog of product which might otherwise develop. Supplies of beef in cold storage are low and there are fewer cattle in feedlots as a result of the decline the U.S. herd, all of which have served to limit the price impact of the economic slowdown.

Further support is likely from the export markets as Asian economies continue to perform well in contrast to the U.S. and Europe. In recent weeks, the U.S. dollar value has been sliding sharply in comparison to other currencies around the world. The result has been an improvement in beef sales to foreign buyers who are able to take advantage of favorable exchange rates which make U.S. beef cheaper than beef from many global competitors which have stronger currencies, such as Canada or Australia. The sliding value of the U.S. dollar has prompted a run up in the value of many commodities in a scene reminiscent of the one in 2007 when a declining U.S. dollar pushed up commodity prices as hedge funds and other investors piled into the market. There are signs that a similar trend is developing in the U.S. markets now. As a result, some market analysts are urging caution. As in 2007, the activity of speculators in the commodity markets could result in a rapid reversal in prices if other asset classes return to favor.

Feeder cattle

Feeder cattle markets were pushed lower again last week by the continued volatility in the grain markets. Corn prices were rising last week ahead of USDA’s October crop production forecast. Many firms are expecting yield numbers to disappoint the market, which could add to the recent gains in corn price. Last Thursday at midday, the December corn contract was trading 10 cents per bushel higher on the Chicago Mercantile Exchange as traders positioned themselves ahead of USDA’s report. Corn was nearing the $5 per bushel mark once again.

Vetterkind noted that the advance in corn prices was likely to be the reason for the lower cash trade in many auction markets last week.

"That said, though, we are getting close to the end of the early fall yearling run of cattle, which is going to support prices on bigger feeder’s and the fall calf run is not going to be as big as year’s past, all of which points to a near term low in cash feeder cattle prices also," he said.

There was also volatility in the southern Plains feeder cattle markets as producers continue to evaluate their prospects for wheat pasture grazing in the winter ahead.

"In some sense, wheat producers are in the enviable position of having the market bidding for both wheat for grain and wheat for forage, making dual purpose production of both look very attractive," said Oklahoma State University Extension Livestock Marketing Specialist Derrell Peel. "Mother Nature is complicating things a bit with dry conditions across much of Oklahoma and pest problems in some regions making it difficult to establish wheat forage."

He said it is important to evaluate all the alternatives before committing to one particular enterprise.

"If one only looks at the price of wheat, it might be easy to dismiss the potential for grazing or vice versa," said Peel. "This last week, the price of a 525 pound steer in Oklahoma was about $115 per cwt. or $604 per head. The March Feeder cattle futures contract price, at the time of writing, was $112 per cwt. With 250 pounds of gain and a zero basis, a 775 pound steer would have a total value of $868/head. This results in a gross margin of $264/head or a value of gain of $1.06 per pound."

"Using a price of 50 cents/lb of gain for wheat pasture cost and typical animal production costs, a stocker budget suggests about $50/head in net return to the cattle. Additionally, 250 pounds of gain at 50 cents/lb pasture cost generates another $125/head return to the wheat pasture. Assuming the marginal costs of growing the wheat forage is 30 cents/lb of gain, there is a net return of another $50/head to the wheat. Thus results in a combined net return to wheat and cattle of $100/head, or roughly $67/acre."

Peel said it is important for producers to evaluate returns for both wheat and cattle before coming to a decision about winter wheat grazing this year.

"While individual circumstances could cause a producer to favor grain only production, it appears that dual-purpose grain and cattle production has considerable potential for attractive returns to both enterprises."

That analysis likely added some early week lift to the market in Oklahoma City, OK, last week where feeder steers traded steady to $1 higher. Feeder heifers were called steady in a light supply and steer calves were steady to $2 higher while heifer calves were $2-3 lower. Demand was called good for steers and moderate for heifers, with buyers reportedly very picky for kind, as well as unweaned versus weaned. Some fleshy unweaned calves were seeing discounts of up to $10 as big temperature swings continue to wreak havoc on the health of these calves.

Farther west in La Junta, CO, last week, steer and heifer calves traded steady to $2 higher with the full advance reported on 400-600 lb. cattle. Yearling feeder steers sold steady to $1 higher with some instances of $2 higher. Yearling feeder heifers sold steady to $1 higher last Tuesday.

On the West Coast, in Galt, CA, feeder steers and heifers under 650 lbs. sold steady. Steers in the 400-500 lb. class brought a range of $120-139 while heifers in the same class sold from $110-125. Steers from 500-600 lbs. sold from $115 to $136.50; heifers in the same class brought $100-118. Steer and heifer offerings over 700 lbs. were called steady to $4 higher. Steers in the 700-800 lb. class brought a range of $97-111.75 while heifers in that class traded from $95-102. — WLJ