Markets turn higher
Fed cattle trade was fully developed by late last Wednesday. For the week, trade reversed its recent slide and moved $1-2 higher on live cattle in the southern Plains where cattle traded in a range of $105-106. Dressed trade in the northern tier was reported at $172-175, a level which was $3-4 higher than the prior week’s action.
Packer margins, which had been lagging well into May, a time at which packers are normally seeing strong profitability, have finally improved. The return of positive processing margins, which HedgersEdge.com estimated at $76.85 profit per head, pushed packers to pay better prices for feedlot showlists last week. However, processing margins have already started to shrink back from their recent highs, according to HedgersEdge.com, which noted that it is important for production levels to remain strong in order to avoid any backlog of market-ready cattle through the summer months.
The largest market mover last week came in the form of USDA’s supply and demand report which showed that expectations for this year’s corn crop are already moving lower after a slow planting season and widespread flooding took their toll. According to the report released last Thursday, USDA now expects planted area for corn to fall by 1.5 million acres to 90.7 million acres. Harvested acre expectations were also lowered by 1.9 million acres to 83.2 million acres. However, USDA continues to expect a record-large corn crop at 13.2 billion bushels, 305 million bushels less than last month’s projection, but still 753 million bushels more than the 2010-2011 crop year. The result will be very tight carryover supplies of an estimated 695 million bushels at the end of next marketing year, down from an estimated 900 million bushels projected last month.
The report resulted in a sharp increase in contract corn prices on the Chicago Mercantile Exchange (CME) at midday last Thursday. The current-month July contract rose 21 cents per bushel to reach $7.85 and December new crop contracts gained 16 cents to $7.10 per bushel on the news. Coupled with the fact that the same supply and demand report lowered beef production expectations by 75 million pounds and increased export projections by 65 million pounds, the news gave fed cattle markets reason to cheer. The higher corn prices, now projected to trade in a range of $6-7 per bushel during the next marketing year, helped boost expectations for higher beef and cattle prices. At midday on the CME last Thursday, live cattle contracts were sharply higher across the board. The upfront June live cattle contract was trading 65 points higher at $104.65 while the August contract added 92 points to reach $105.47. The remaining contracts through December 2012 all showed triple digit gains on the news.
However, analysts noted that demand will continue to be a significant factor in the markets, despite the very tight supply picture going forward. Vetterkind Cattle Brokerage Analyst Troy Vetterkind noted that there will still be significant market challenges ahead.
"In my opinion, we are going to continue to struggle with the cash cattle and beef markets until we get past July before the market gets good again," he said. "I think August live cattle will continue to struggle above $107-$108 in the near-term and they are probably a sell on a test of that resistance."
He said the key to future direction lies in how well retailers are able to move beef into domestic consumers. Last Thursday at midday, boxed beef prices were under pressure as high prices continue to trim demand. The Choice product was down $1.38 at $172.77 while Select was off 24 cents at $167.94 as consumers continue to resist higher prices. Summer supply of fed cattle, after large placements in recent months, will also play a roll in market direction, Vetterkind noted.
"Sluggish beef markets and ample numbers of fed cattle to kill in the coming weeks are likely to limit cash gains and we still may have not seen the summer lows yet," he noted.
Timely marketings of fed cattle will be important through the summer months into the early-fall period, analysts have said frequently. The premiums available in deferred fall contracts often cause cattle to stack up in feed yards, resulting in a glut of supply and capping cash market potential. If that is to be avoided, it’s important to move the current supply of cattle through processing lines in a timely fashion.
The concerns about timely marketings are not without some evidence to back them up. Last week, early estimates for the coming cattle on feed report indicated that, already, sales are slowing. According to Livestock Marketing Information Center (LMIC) projections, fed cattle marketings during May are expected to come in 3.3 percent higher than last year. However, there was one additional marketing day during the month, compared to last year.
"Therefore, daily average feedlot marketings were about 1.5 percent below (May) 2010," LMIC analysts noted.
However, they also reported that there is an additional factor that is adding support to U.S. cattle movement through processing lines.
"Marketings continue to be supported by packers procuring U.S. cattle due to significant declines in their imported Canadian slaughter steers and heifers," they said.
The result is expected to be a smaller June 1 cattle on feed number when the report is released.
"The on-feed inventory is expected to be just over 5 percent above a year ago as of June 1, 2011," LMIC analysts noted. "That year-on-year increase is significantly smaller than on May 1 (which was up 7.4 percent)."
Likewise, placements are projected to fall sharply from year earlier levels. LMIC predicts that placements of feeder cattle will fall 8 percent from May 2010 levels, reflecting cyclically tighter feeder cattle supplies.
"Several states may report double digit placement declines compared to last year," they noted.
Those early estimates and the rally in fed cattle prices last week helped to boost feeder cattle prices last Thursday on the CME. The contracts were trading in the green across the board with the August contract adding 55 points to reach $125.35 while October and January got the biggest boosts, rising 82 points and 110 points respectively. At midday, October reached $127.80 while January hit $129.10.
Likewise, cash feeder cattle markets last week improved on the fed cattle market improvement. Many markets are reporting declining numbers and the light supply also serves to boost prices, according to reports. In Oklahoma City, OK, last week, feeder steers traded $2-5 higher. Feeder heifers were called steady to $2 higher and steer and heifer calves sold steady. Demand was reportedly moderate to good for all classes on offer although supply was reduced from last year’s levels.
Farther west in La Junta, CO, steers and heifers under 700 lbs. were called mostly steady with some instances of $1-2 higher. Yearling feeder steers and heifers in a light test sold mostly steady.
The light supply of feeder cattle in central states has pushed buyers to markets as far away as the West Coast to meet feedlot demand. In Turlock, CA, a number of out-of-state buyers were reported in attendance at the sale. The market was reportedly very active and prices were strong. Steers in the 400-500 lb. class brought a range of $135-150 while heifermates sold from $115-128. Heavier steers in the 600-700 lb. category sold from $118 to $130 while heifers in the same class sold at $107-119. — WLJ