Weather cuts demand

Markets
Feb 3, 2011
by WLJ

Fed cattle prices higher despite disruptions at the retail level.

Winter weather hampered the markets last week and delayed most fed cattle trade into the late-Thursday or Friday period. The cash market was expected to get a small boost from the storm that plagued much of the U.S. last week but it also cut into retail sales, tempering enthusiasm among buyers. Early trade in Nebraska was reported last Thursday at $167-169 dressed on light volume. For the week, analysts predicted trade would unfold in a range of $1-2 higher at $106-107 live and $169-171 dressed.

Analyst Troy Vetterkind of Vetterkind Cattle Brokerage said last week that the winter weather was having more of an impact on retail sales than on cattle performance, at least in the near-term. The result was lackluster demand for beef items and a lack of desire among packers to pay higher prices for cattle inventory. The result was choppy trade in the boxed beef markets last week where the Choice product traded 68 cents lower at midday last Thursday while Select was up 2 cents at $171.70 on light to moderate trade and demand. Slaughter volume for the week was expected to hit 640,000 head.

Vetterkind said there is some talk in the market about beef prices running up against consumers unwilling to pay higher prices at the retail level.

"In all, with the recent run up in beef prices and the seasonal weakness in beef demand throughout the month of February, I would look for the cash beef trade to be challenged for a couple weeks with a lower trend to cutout values being the end result," he explained. "Export business will be around and will be supportive to price on breaks."

However, he also cautioned that there are concerns that the ongoing unrest in Egypt could impact beef prices slightly in the weeks ahead.

"Egypt is our fourth largest export destination for beef and beef variety meats, taking 101,237 metric tons (MT) of beef product through November of last year," Vetterkind explained. "This was an increase of 30 percent from 2009 and compares to beef exports to Mexico of 224,146 MT, Canada of 137,196 MT, Japan of 115,178 MT, and Korea of 101,252 MT. Egypt buys more variety meats from us than anything, however, muscle cuts of beef are making a larger presence."

If there is a trade disruption, it could cut into beef and cattle prices as the drop price declines due to a slowdown in offal and whole muscle beef sales to Egypt.

Export sales to other countries remain robust with early 2011 sales well above 2010 levels for the same period. For the week of Jan. 21-27, USDA reported net sales of 14,800 MT, with the largest share going to South Korea, which purchased 4,200 MT. Korea is struggling with a wide-spread foot-and-mouth disease outbreak which has cut deep into that country’s production capabilities. Buyers there have turned to imports to fill the void. With Australia dealing with severe flooding and a large cyclone last week, U.S. exporters have stepped in to fill the gap.

Export sales to Mexico were nearly as large during the period with sales of 4,000 MT and Canada, Japan and Vietnam rounded out the top five with purchases of 1,900 MT and 1,800 MT respectively.

Vetterkind noted last week that the futures market is starting to see signs of volatility at the current high levels and cautioned against complacency as markets gave indications last week that the future could turn lower in the near-term.

"I don’t know if the highs in the cash cattle or futures market is in yet, but this recent leg up in the market feels to be losing momentum," he said.

Vetterkind explained that the futures market’s inability to push through resistance levels at $116.60 on the April fed cattle contract last Wednesday indicated that the market has seen its near-term tops for awhile, indicating the possibility of some downside ahead.

"We tried to get through topside resistance and failed, so it would appear now that we are going to test downside support. The first level of support in April live cattle shows at $112 and we bounced pretty well off that going into (last Wednesday’s) close," he said. "A close below $112 takes you down to more solid support at $110, where a failure there takes the market down to retracement levels from the entire June-Jan. rally of $108 and $105."

Feeder cattle

Feeder cattle futures markets were pushed lower last week on some of the same volatility that hampered live cattle contracts. Coupled with the winter weather that had feedlots delaying placements and a corn market that may soon challenge the $7 per bushel level, feeder cattle contracts were left with a wall of worry to climb.

"Given the positive technical picture of the corn market now and the sloppy performance in live cattle futures, I would say that feeders have the most to lose right now. Corn looks like it wants to go to $7-plus, the fat cattle/beef markets act like they could be sloppy here for a minute, and feeders are too high priced to break even against forward marketing time frames," said Vetterkind.

Cash markets were also affected last week, with reported numbers down across most markets in the Plains and Midwest regions. The storm, said to be one of the largest in several decades, dropped two feet of snow across several states and had feedlots putting off deliveries of feeder cattle. As a result, prices in many auction markets, where a test was reported, were lower last week by several dollars. The rise in grain prices also contributed to the decline in feeder cattle prices. Last Thursday, the July 2011 corn contract was trading at $6.80 per bushel at midday. The value of the U.S. dollar slumped to two-month lows last week, which was increasing the interest in U.S. grains from foreign buyers. If the dollar stays low, it could cause a further spike in corn prices into summer, cutting into feeder cattle prices. Analysts were cautioning producers to lock in prices at current levels if they are able.

"Producers should be buying put options on rallys or selling futures and buying calls to protect inventory that will market in the next six months," said Vetterkind.

The fears that we might run out of cattle, which seem to have cropped up since the first of the year, haven’t come to fruition yet and that, too, has cut into feeder cattle prices, according to some analysts. Although the annual cattle inventory report from USDA two weeks ago indicates tight supplies will continue to support prices, it is not the only factor to consider when market prices are examined and producers should be cautious for volatility.

Last week in Oklahoma City, OK, which sold cattle ahead of last week’s storm, reported prices were $2-4 lower on feeder cattle. Feeder steers under 700 lbs. and steer calves traded $4-8 lower. Feeder heifers were called steady to $2 lower while heifer calves sold $2-4 lower. Demand and buyer attendance were reportedly light to moderate last Monday.

Meanwhile, at the sale in La Junta, CO, light steer calves sold steady last week from $165-180 while heavier classes were $2-3 lower from $140-162. Light heifer calves were steady from $135 to $150 and heavier heifers traded from $125-137.

Due to the weather and temperature conditions last week, most northern tier markets were either shuttered or runs were reduced to levels that did not offer a valid market comparison. However, farther west, feeder cattle markets continued strong in California. At the sale in Galt, feeder steers and heifers under 650 lbs. traded steady while those over 700 lbs. sold steady to $3 higher. — WLJ

{rating_box}