Price pressures continue to push fed cattle lower

Markets
May 6, 2011
by WLJ

Fed cattle prices trended lower again last week in early trade, which was mostly complete by the end of the day Tuesday. Live cattle traded at $114 to $115 in the southern Plains, down $1-2 from the prior week’s action with most showlist cattle reportedly cleaned up. Meanwhile, in the North, dressed trade was reported at $185 to $186 with only light volumes being reported for the week. Cattle in the North were reportedly a little greener than their southern counterparts, so the light volume looked to be enough to finish the dressed trade for the week.

Commodity fund liquidation in the ag contracts was a significant factor in last week’s cash cattle trade. Prices for commodities last week took an early hit and it was widely reported that margin calls in metals and oil trade resulted in the liquidation of some agricultural commodity contracts, adding to the already significant downward pressure on contract prices. The result has been a great deal of volatility in the grain and livestock trade, with triple-digit swings in cattle prices common over the past couple of weeks as concerns about pull-through demand from domestic consumers and pressure from weaker than expected foreign and domestic economic data pushing prices mostly lower.

Retailers have been encountering some difficulty moving beef, according to reports, and with gas prices continuing higher ahead of the summer driving season, it’s likely that the situation won’t ease any time soon. Last Thursday, midday boxed beef prices were lower as a result of that pressure, with packers discounting product to keep the volume up. Choice boxed beef prices were down $1.27 from the prior afternoon at $179.67 while Select was down 26 cents at $174.76. Volume showed signs of improvement at those levels, which could indicate that prices could be nearing a level of stability, which would, in turn, indicate that fed cattle prices could also be reaching a level of near-term support, although prices are likely to trend somewhat lower into the summer months. The June live cattle contract last week was trading at $110.32 last Thursday, which was very close to near-term support levels for the June fed cattle contract, a level which coincides with the March low, analyst Troy Vetterkind of Vetterkind Cattle Brokerage said last week.

"Technically, if you look at both live and feeder cattle charts, it looks like we have put in some ‘head and shoulder’ tops for the time being. Price projections from such a top, by measuring from the head down to the neckline, would take June live cattle down to $105-102 and August feeder cattle down to $125-122," he said. "Just something one should be aware of and need to realize in case the funds want to continue shelling out of the cattle market. Keep in mind that a $105 June board and a $3 positive basis is still a $108 cash fat cattle market, which isn’t out of the realm of possibility for a summer low. Regardless, the charts have turned negative and while we come into this morning a little oversold, I still think we are going to run into selling $1-2 above the market in the near-term."

Feeder cattle

Feeder cattle contracts at midday last Thursday were also under pressure as Vetterkind mentioned. The nearby contracts were faring better than deferred months, with some triple-digit losses showing up on fall contract trade. The market appears to be pricing in concerns about a softening of the economy in the second half of 2011, and markets spent much of last week under pressure as a result.

The cash auction market sales last week were a mixed bag, with the contract trade adding some downward bias to the week’s trend. However, some moisture in portions of the southern Plains brought some enthusiasm back to those sales.

In many markets, the spring runs are beginning to wind down, with most reporting declining run numbers, a fact pointed out last week by North Dakota State University Extension Livestock Economist Tim Petry.

"Many auction markets are reporting sales volumes at 20 to 30 percent of peak runs in February. And the percentage of heifers selling is outnumbering steers as the heavier steers were sold earlier," said Petry.

In contrast to many southern Plains markets, across the northern states, Petry noted that ample moisture conditions in the northern Plains and favorable calf prices have led to a good demand for replacement quality heifers.

"Prices for replacement heifers are rivaling their steer weight group counterparts in many cases. For example, last week in Montana, both 700 lb. steers and replacement quality heifers were bringing about $137 to $138 per hundredweight," he said. "Interest in retaining heifers in the northern Plains was evident in the Jan. 1 USDA-NASS Cattle Inventory Report, with beef replacement heifers up over 19 percent in Montana, over 12 percent in North Dakota, and over 5.5 percent in Idaho."

He also reported that the most recent Cattle on Feed report, issued in April, indicated that there are other signs of heifer retention.

"USDA (National Agricultural Statistics Service) indicated that about 36.4 percent of cattle on feed were heifers, which is the lowest number of heifers in several years. Buyer interest in replacement heifers further complicates the question of how many feeder cattle will be available for feedlot placements in the next few months," said Petry. "The number of feeder cattle outside of feedlots on Jan. 1, 2011, was reported by USDA-NASS to be down about 3.33 percent from a year ago. Yet feedlot placements were up 4 percent in January, down slightly in February, and up 3 percent in March."

He said that the increased placements thus far in 2011 came from a number of sources.

"Extremely dry conditions in many parts of the southern Plains forced calves to move from grazing into feedlots earlier than normal. The dry conditions extend down into Mexico as well. That, coupled with historically high prices, caused more feeder cattle imports from Mexico," he said. "For the week ended on April 23, a total of 464,535 Mexican feeder cattle had entered the U.S. 108,208 more than last year. Many of these feeder cattle likely went directly into U.S. feedlots rather than grazing programs due to the drought conditions. Furthermore, calf slaughter is down about 15 percent from last year which has resulted in increased placements of dairy calves on feed. Cattle on feed on April 1 in important dairy states included Washington up 23 percent from last year followed by California up 8 percent and Idaho up 7 percent."

The overall picture points to a declining supply of feeder cattle, which should be supportive of calf prices into the end of the year.

"It seems likely that at least some of the increased 2011 placements have been the result of placing lighter weight cattle early," said Petry. "So, feeder cattle supplies could be tight for the next few months, with lower feedlot placements more in line with what was expected from the lower Jan. 1 inventory."

In the auction markets last week at Oklahoma City, OK, some of the previously mentioned optimism sparked a small rally in prices. Feeder steers sold steady to $3 higher while feeder heifers sold steady. Stocker cattle and calves traded steady to $2 higher with demand called very good for feeder and stocker cattle offerings at the sale.

Farther west in Hub City, SD, feeder steers and heifers in the 500-800 lb. class sold steady while feeder steers and heifers from 800-1,100 lbs. sold $1 to $3 lower at an active sale with good buyer demand.

Meanwhile in La Junta, CO, last Tuesday, weight classes of steers and heifers under 700 lbs. were called mostly steady except for the 600 to 700 lb. stocker heifers, which traded $2 higher. Yearling feeder steers and heifers traded steady.

On the West Coast in Famoso, CA, stocker steers and heifers continue to find big demand and record-high prices, with steers trading steady and stocker heifers posting a $2 advance from prior week levels. Feeder steers were also $2 higher, with the best demand reported on 700-800 lb. offerings. Feeder heifers were reportedly steady last week. — WLJ

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