Fed trade steady

Markets
Nov 19, 2010
by WLJ

Fed cattle trade last week was slow at midweek with cattle trading in the southern Plains at $98-98.50 live and at $155-158 dressed in the northern Plains and Corn Belt, prices steady to $1 higher than the previous week’s trade.

Strength in the boxed beef markets created by solid demand added support to the market last week as packers work to procure cattle to meet pre-holiday orders ahead of the Christmas and New Year’s buying rush. Traditionally, the time period ahead of Thanksgiving marks a downtrend in cattle prices and the fact that prices have remained firm ahead of the holiday bodes well for the market, according to analyst Troy Vetterkind of Vetterkind Cattle Brokerage.

"I think the fact that feedlot managers were able to hold the market steady in the south and even get some higher money in the north bodes well for the fed cattle market going into the middle of December," he said. "The beef market is holding pretty firm ahead of Thanksgiving with better than expected demand, and I think this will only get better going into Christmas. Plus, the futures market acts really good too."

Last Thursday, the futures markets traded sharply higher as a result of strength in the outside markets. Live cattle contracts were trading sharply higher, closing up $1.35 at $100.70 on the December contract while February was up $1.70 at $104.30 and April added $1.57 to close the session at $107.55, representing good hedging opportunities for fed cattle. Vetterkind said he believed that the market strength would continue into December, given the strength in the futures trade last week, which was likely to translate into higher fed cattle prices ahead.

Already, packers are procuring cattle to meet holiday needs, and movement of beef into both domestic and international channels has been good over the past couple of weeks. As a result, the boxed beef markets have been trading steady for the past week. Last Thursday, Choice boxed beef was down slightly at midday at $159.18 while Select was down 17 cents at $149.43 with moderate trade reported. Slaughter volume for the week through Thursday was well above the previous week at 524,000 head. That estimate is 11,000 more than the previous week and sharply higher than the 491,000-head harvest reported for the same period in 2009. According to Vetterkind, the market was expecting a 655,000-head production week.

U.S. consumer demand has been stronger during the second half of 2010 than many analysts believed it would be. However, there are concerns that rising food and fuel prices could cut into the discretionary spending that drives beef prices. There has been sharp inflation in some commodity prices that is translating into more expensive food. Fuel prices are also higher than a year earlier, averaging just a few cents short of the $3 level on a national average basis. That price is 26 cents higher than year-earlier levels and approaching a level that economists worry could hurt the tentative U.S. economic recovery. The 26-cent advance in fuel prices alone is removing about $25 billion from consumer’s discretionary spending ability compared to last year. Unless jobs become more readily available, the rise in commodity prices and spending may not be sustainable at current levels.

However, for the time being, the pace of fed cattle marketings is keeping cattle feeders’ inventory very current. Although the action in deferred contract months could begin to result in market-ready cattle stacking up after the first of the year, there is no sign that is occurring now. Analysts estimate that cattle on feed numbers, when they are reported by USDA on Nov. 20, will be up just 2.8 percent from last year. Marketings during October are expected to be 1 percent below last year’s levels, although there was one less slaughter day during the month, so average daily marketings are expected higher. Average analyst estimates for placements last month are 0.2 percent below October 2009.

Additional enthusiasm was found last week after corn markets took a sharp nose dive, losing nearly $1 from their recent highs. Although some of those losses were regained later in the week, it presented cattle feeders an opportunity to lock in some lower corn prices. Likewise, it should help offset some cow herd costs. That in turn may encourage some cow/calf producers to begin rebuilding their herds. The continuing herd declines in the U.S. are a frequent topic of conversation among market analysts and many analysts are puzzled about the lack of growth in herd numbers. However, Derrell Peel, Oklahoma State University Cooperative Extension livestock marketing specialist, says that some of the lack of growth can be explained by the fact that producers have become better at producing more pounds of beef and capturing more value for those pounds.

According to USDA statistics, the U.S. beef cow herd has decreased 12 of the last 14 years, dropping from a cyclical peak of 35.3 million head in 1996 to the January 2010 level of 31.3 million head. This represents the smallest beef cow herd since 1963.

Combined with smaller dairy cow numbers, Peel said the 2010 calf crop is expected to be 35.4 million head, the smallest U.S. calf crop since 1950. Total U.S. cattle inventory has decreased by almost 10 million head since 1996 to the January 2010 level of 93.7 million head, the smallest cattle inventory since 1959.

In contrast, total beef production has not changed accordingly. In fact, 2010 beef production is projected at 25.9 billion pounds, slightly higher than the 1996 level of 25.4 billion pounds.

"We have maintained production thus far in two primary ways," Peel said. "First, decreasing inventories allows the industry to utilize that inventory as production while numbers are declining."

Second, between 1996 and 2006, cheap corn allowed the industry to feed animals to ever-increasing carcass weights and to feed lightweight calves for many days in feedlots. Feedlot inventories have thus been maintained by a slower rate of turnover.

"In effect, the U.S. cattle industry has been able to effectively turn fewer cattle into more pounds of beef," Peel said. "However, the situation is now different."

Expensive corn forces the industry to feed heavy yearlings and move them through the feedlot faster. Carcass weights in 2010 have been below year-ago levels almost all year and high feed costs likely limits carcass weights to little or no trend in coming years. A faster feedlot turnover rate exposes the shortage of cattle quickly as feedlots scramble to find sufficient supplies of feeder cattle to place on feed and maintain feedlot inventories.

"So far, we appear to have been able to do that," Peel said. "Total cattle slaughter for 2010 is running almost 2 percent above 2009 levels. Steer slaughter is up less than 1 percent this year. By contrast, heifer slaughter is up nearly 3 percent and cow slaughter is up 4 percent. It is clear that we are maintaining slaughter rates, in the short run, with our females."

Peel cautions this is not sustainable without accelerating herd liquidation. At some point, the U.S. cattle industry will try to stabilize the herd size and then expand a bit.

"Given the current situation, this implies a significant reduction in cattle slaughter in the short-term just to hold the cow herd size steady," he said. "It seems likely this process will start in 2011."

Feeder cattle

Feeder cattle markets last week were reported mostly $2-4 higher with the previously noted drop in corn prices responsible for much of the advance. Cattle numbers appear to have peaked in most areas, which Vetterkind noted should also help provide support into the end of the year until run sizes typically begin to increase again in mid- to late-January.

"With prospects of higher cash fed cattle markets going into mid-December, I would look for higher feeder cattle markets going forward," Vetterkind said.

Last week in West Coast markets, prices were good ahead of the holiday week which will see many markets closed for Thanksgiving. In Cottonwood, CA, at the Lake County Cattlemen’s special sale, light cattle offerings under 450 lbs., were in short supply and not well tested, but all other classes of stocker and feeder cattle sold $1-6 higher. Steers over 700 lbs. were called steady to $2 higher while heavy heifers were $2-5 higher than the previous week’s action. Meanwhile in Galt, CA, feeder steers and heifers under 650 lbs. were called steady to $5 higher last week while feeder steers and heifers over 700 lbs. sold steady with the prior week’s sale. And in Famoso, CA, the market was called steady to $3 higher with the most advance on stocker heifers on big demand. Prices at the market were reportedly at record levels for stocker cattle.

Farther north in Oregon, prices were also strong last week. In Madras, OR, steers in the 500-600 lb. class sold from $127-138 while heifers in the same weight class were moving in a range of $108-121. Heavier 700-800 lb. steers sold from $108-118.50 while heifers were $97.50 to $108. In Black Foot, ID, feeder cattle sold steady with 500-600 lb. steers in the $115-130 range and heifermates were $105-122. Steers in the 700-800 lb. category sold from $103 to $115 and heifers were $5-7 back.

Farther east, in Bassett, NE, steers and heifers on offer traded steady to $2 higher than the prior week’s sale on good demand. Meanwhile, in Lexington, NE, steers in the 450-650 lb. class sold $1-4 higher with some lots selling as much as $7 above the prior week’s results. Heifers in the same class were steady to $1 higher with some instances of as much as $3 higher on demand that was called moderate to very good. At the market in La Junta, CO, steer calves under 600 lbs. sold $3-5 higher with some instances of as much as $8 higher. Offerings over 600 lbs. were called $2-3 higher last week.

In Oklahoma City, OK, feeder steers were called steady to $3 higher while feeder heifers traded steady to $2 higher on a light test. Steer calves sold $2-5 higher and heifer calves were steady to $2 lower on moderate demand. — WLJ

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