Prices post big increase as demand soars

News
Oct 22, 2010
by WLJ

Fed cattle prices took a big leap higher last week as packers came to the table on Wednesday paying $101-102.50 for live cattle, prices which were $4-5 higher than the previous week. Dressed cattle sales came in $7-8 higher than the previous week at $158-160. Sales volume was good in all feeding regions, with reports that many of the days’ sales were deferred to later weeks, as packers worked to secure inventory needs into the future.

Prices could continue to move higher if live cattle contract prices are any indicator. Last Thursday, contract prices were mixed, but trading at or above current cash market levels, offering a good hedging opportunity. The April 2011 contract in particular was attractive, trading up to $106.15 at midday last Thursday.

Good gains in boxed beef prices last week helped to pave the way higher for live cattle trade as packers managed to push prices to nearly $161 on the Choice product. Select traded at $154.03 at midday Thursday. Both Choice and Select composite cutout values were $8 higher than the previous week, which helped with packers’ willingness to pay up for cattle as margins improved. According to HedgersEdge.com, margins last Thursday stood at $26.75 per head, although boxed beef movement into domestic channels was showing signs of slowing at current prices. Whether that trend continues remains to be seen. Analyst Troy Vetterkind of Vetterkind Cattle Brokerage said last week that some retailers were coming into the market in an effort to secure product before prices made any additional advance.

"Gains were posted throughout the entire beef carcass as well as the boneless beef complex. Wild gyrations in currency values also prompts certain export buyers to procure product in an attempt to take advantage of favorable exchange rates," he said. "We likely see a certain amount of production cuts next week and this, along with improved interest for beef, will keep cutout values moving higher into next week."

He noted that the export markets were particularly strong last week as weekly sales hit their highest level since January 2002, with net sales of 27,400 metric tons. Asian currencies are posting gains against the U.S. dollar, which is making U.S. beef purchases more attractive than those from Australia or elsewhere. As a result, U.S. export sales to Asian buyers were excellent last week. Sales to South Korea reached 6,400 metric tons, Japan was the second largest buyer by volume, with sales of 5,100 metric tons, and sales to Vietnam reached 4,500 metric tons. Mexico was the fourth-largest foreign buyer of U.S. beef with sales of 3,400 metric tons last week.

Tight supplies of market-ready fed cattle are playing a significant role in beef’s ability to make gains in a market facing lackluster domestic demand. Cattle on feed numbers were expected to show an increase from last October, however, levels are still trending below the five-year-average. The Livestock Marketing Information Center (LMIC) predicted that on feed numbers were 2.8 percent higher on Oct. 1, 2010, than a year-earlier. Although the increase is significant, it still leaves a tight supply in feed yards as demand begins to grow, leaving the fed cattle market poised to challenge all-time price highs if trends continue uninterrupted. LMIC predicted that September placements would also post an increase when USDA released the numbers last Friday. Placements were expected to grow 1.5 percent while September marketings were expected to increase 2.1 percent from year-ago levels.

Although placement levels have been posting year-over-year increases, that trend is expected to change, according to analysts. The rise in corn prices over the past month is likely to limit feedlot placements as cattle feeders look to cut costs of gain as much as possible. That will lead to more lightweight cattle being shipped to grass or backgrounding yards this winter, limiting supplies of available fed cattle into next year, which will, in turn, be supportive of fed cattle prices.

Feeder cattle

The rise in corn prices which has cut into feeder cattle prices and demand during the first half of October was offset by last week’s big advance in fed cattle prices. Feeder cattle markets were mostly higher and most reported price declines were moderate and were more related to quality issues than concerns over corn price. That said, there is expected to be a shift in demand for feeder cattle. As noted, there will be a change in how feeders handle replacement cattle this winter if corn prices continue at current levels or move higher. The demand for heavyweight placements will increase, making the option of retaining ownership of cattle through a stocker operation or backgrounding lot an attractive prospect for producers who have good supplies of reasonably-priced feedstuffs available this winter. Oklahoma State University Extension Livestock Marketing Specialist Derrell Peel noted that southern Plains wheat pasture, which is generally a resource for backgrounders, is beginning to look a little questionable this year due to a lack of moisture thus far in the growing season.

"As a result, calf prices have dropped more than previously expected due to the lack of stocker cattle demand. This sets up a situation where cow/calf producers should consider the feasibility of implementing some sort of backgrounding program for weaned calves," Peel said. "Retained ownership allows cattle producers to change the timing of animal sales, which may have marketing advantages. I don’t often recommend using retained ownership strictly as a marketing tool. After all, holding calves into a stocker or backgrounding program means that the producer is taking on a new cattle production activity."

He said such a plan needs to be feasible from a production standpoint before it can help with marketing.

"This means evaluating the resources required, feed, facilities and labor, to be sure you can manage the health of the animals and put together a nutritional program that will provide acceptable gains," said Peel. "This may involve standing forage or hay along with some supplement. It might be grazing, semi-confinement or a drylot situation."

He said this option may be ideal this year for retaining calves.

"The additional weight gain is needed and the stocker industry does not have the forage to do it as easily as usual. The value of gain provides the incentive to look at more creative stocker or backgrounding programs," said Peel. "Last week in Oklahoma, 519-pound steers were priced at $115.07/cwt. and 680-pound steers had a price of $110.34/cwt. This means that the value of an extra 161 pounds of gain on the steer was 95 cents per pound. Can you design a backgrounding program to put weight on and provide a decent return relative to this value?"

He said there are still risks involved, such as a drop in price before cattle can be marketed, but corn prices are expected to remain high, meaning the value of the added weight on cattle will also remain strong.

"If it rains soon in the southern Plains, the demand for stockers may rebuild and one could choose whether to continue with the backgrounding program or go ahead and sell the animals. Either way, there is relatively little downside risk in putting on another 100 to 300 pounds on weaned calves," said Peel. "The futures market is volatile but does provide an opportunity to lock in the margin on weight gain and reduce the price risk for feeder cattle. A little creativity in designing a backgrounding program could be worth the effort this fall."

There was a little rain in the forecast for Oklahoma last week, which helped add some enthusiasm to the sale at Oklahoma City. Buyers bought feeder steers and heifers at prices which were steady to $1 higher than the previous week. Steer and heifer calves traded steady to $2 higher on moderate to good demand.

Farther west, in Torrington, WY, steers and heifers under 700 lbs. sold $3-5 higher last week and those over 700 lbs. were called $2-3 higher with some instances of $4-6 higher noted on heifers. Demand was called good.

On the West Coast in Galt, CA, feeder steers and heifers in all weight classes traded steady to $2 higher than the previous week’s sale. In Cottonwood, CA, steers sold $3-5 higher while grass weight heifers posted a $3 decline from the previous week’s strong sale. Feeder heifers were called $1-4 higher. At the market in Famoso, CA, stocker steers traded $3 higher last week while heifers were called steady with the previous week. Feeder steers and heifers also traded steady with the prior week’s levels. — WLJ

 

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