Australian flooding provides big boost to U.S. cattle prices

Markets
Jan 14, 2011
by WLJ

The fed cattle markets last week looked likely to benefit directly from the global nature of beef trade. Heavy rains have caused severe flooding in portions of Australia. The flooding shut down the port of Brisbane, Australia, which is responsible for shipping much of the beef from the states of Queensland and New South Wales to international buyers. With the port closed for the time being, traditional customers of Australian beef have turned to the U.S. to fulfill their needs, at least for the short-term. However, with flooding expected to continue into the weekend and the possibility of another storm due next week, U.S. beef demand could continue strong for some time.

The futures markets last week took note of the increased demand in the export markets and surged higher, driving expectations for cash trade higher along with them. Trade was delayed into the later portion of the week with no trade reported in any feeding area through midday last Thursday. Market analysts were saying the week’s trade was likely to be higher than the prior week’s action as a result of the improving cutout and strong demand.

Analyst Troy Vetterkind of Vetterkind Cattle Brokerage said he expected trade in a range of $108-109 live and $170-172 dressed when it finally occurred last week.

The sharply higher cutout values last week added to the likelihood that cash trade would move higher. At midday last Thursday, the Choice cutout was trading 32 cents higher than the previous day, at $168.91, while Select was up 34 cents at $164.13 on good trade volume. Production for the week was expected to hit 640,000 head as packers worked to keep up with the strong order volume. According to Vetterkind, the accumulated exports for 2010 reached 637,900 metric tons, up 33 percent from the previous year’s tally. Beef production is predicted to increase during 2011, according to USDA figures released as part of the monthly supply and demand report, so the added help from stronger export demand will be welcome. Imports are expected to decline as a result of a weaker U.S. dollar during the coming year, Vetterkind noted.

If exports continue strong through the year as predicted, it will help support the premium price structure in the live cattle contract market, which put in several new contract highs last week. However, many analysts were cautioning last week that there was a significant need to protect future marketings given the strong prices available in the deferred month contracts.

“I would continue to look at put option strategies to hedge expected production from now until the middle of summer,” said Vetterkind. “Because at some point in time, we will put a top in the market and the break could be pretty fast and furious.”

Grain markets also provided a boost to fed cattle contracts last week. USDA lowered its production forecasts for both corn and soybeans, pushing prices sharply higher at midweek. That helped move live cattle higher as well. Last Thursday, the futures markets were trading a little lower at midday, however, strong prices still reigned out through 2012. The spot month February live cattle contract was 30 points lower at $109.90 while April was 20 points lower at $114.37 and June traded down 7 points to hit $112.30.

There remains a question about how far consumers in the U.S. will be willing to stretch their budgets when rising cattle prices eventually translate into higher prices at the meat counter this year. Retailers have been swallowing much of the run-up in prices, however, there is widespread agreement that beef prices will increase in 2011. Consumers remain somewhat constrained in their purchases at nearly all levels and food price inflation may spark a further tightening of the belt when higher prices are passed on by retailers as they must be at some point. That remains a significant downside concern for many in the industry and it bears watching because if it occurs, it could cut into cattle prices back up the production chain.

Feeder cattle

Cash feeder cattle prices last week were stronger again as buyers bid up values at auction markets across much of the country. Prices were generally $2-4 higher in many markets, with very few instances of any price declines noted. With the strong deferred premiums available in live cattle contracts, cattle feeders are bidding aggressively for replacement cattle to fill pen space. It remains to be seen whether the increase in corn prices last week will eventually add pressure to feeder cattle markets, but for the time being, prices have been strong.

Last week, the Livestock Marketing Information Center (LMIC) reported that cattle feeders enjoyed their best returns since 2003.

“In 2010, assuming steers were sold every month, the annual profit was about $8 per head. Of course, better than average cattle performance as well as effective management and marketing practices could result in much higher profits than the LMIC estimates. Within the year, there were some months with very good profits on closeouts while others posted significant losses,” LMIC analysts noted. “The closeout month with the highest profit during 2010 was April, about $120 per steer. Two other months had profits over $65 per steer, March and May. Early and late in the calendar year, most closeouts posted red ink, with January, November and December having estimated losses over $50 per steer. Importantly, the December profit would have been positive if feed costs were locked-in when the steers were placed into the feedlot.”

For the year ahead, though, the picture is muddled somewhat by higher feed costs and the rise in feeder cattle prices, which will make cattle feeding profits more difficult.

“Breakeven sale prices for 750-pound steers placed in December 2010 were nearly $111 per hundredweight, compared to just over $88 a year ago,” analysts said. “Preliminary estimates indicate the most profitable sale months are expected to be the first three and the last three months of this year.”

Last week at the auction market in Oklahoma City, OK, feeder steers sold steady to $2 higher. Feeder heifers were called steady. Stocker steers and steer calves traded steady to $3 lower while heifer calves sold steady. Demand was reportedly good for feeder cattle, moderate for calves, and very good for calves under 500 lbs. Meanwhile in La Junta, CO, feeder steers under 600 lbs. were mostly $8-10 higher while those in the 600-700 lb. class sold $1-2 higher. Feeder heifers under 600 lbs. traded $3-5 higher and those from 600 to 700 lbs. were called $1-3 higher. Yearling feeder steers and heifers sold $2 to $3 higher.

Farther west in Eugene, OR, last week, feeder cattle prices were reportedly as much as $10 higher than the prior week with steers in the 500-600 lb. class selling from $110-139 while heifers of similar type and kind brought a range of $115-128. Steers in the 700-800 lb. weight range sold from $95-106 and heifers were $97-99. In Vale, OR, lightweight grass cattle were steady to higher with 400-500 lb. steer calves bringing $128-144 with heifers in the same class bringing $123-129. Yearling cattle were called steady.  

Meanwhile in Prescott, AZ, steer and heifer calves traded sharply higher last week with prices as much as $10-14 higher. Yearlings were trading $5-7 higher. — WLJ

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