Fed cattle trade $6 higher

Oct 7, 2011
by WLJ

Cattle futures traded higher last week, pulling the live and dressed cash markets with it. The October contract was trading at $122.20 Thursday and deferred contracts were trading in the same range. April seems to be where the next price advance is and was trading at $126.05 last Thursday. December corn took a quick dip last Tuesday, trading as low as $5.85, the best buying opportunity we’ve seen in some time.

Cattle traded very late Friday afternoon Sept. 30, setting the market at $120 live. The momentum stayed with the market and most of last week’s trade was on Tuesday and Wednesday, trading steady with that Friday afternoon’s prices. Packers were enthusiastic buyers and purchased cattle $6 higher over the past five trading days.

Packers are in an awkward situation as the boxed beef cutout continues to trade in the $184 range on moderately good trade volume. Processing rates were much higher than the prior week when 677,000 head passed through processing plants, 20,000 head more than the same week a year ago. The latest packer margin index showed packers losing $50 per head and they continued to be ag gressive buyers.

“We saw further clean-up trade in the south at $120-$121 money with weekly sales volumes looking good enough to call trade largely wrapped up for the week,” said Troy Vetterkind, Vetterkind Cattle Brokerage, in his report last Thursday. “In the north, we saw cattle trade [Wednesday] at $121-122.50 live and $1.90-1.91 dressed,” he added. We haven’t seen cash cattle trade even with the futures markets for quite some time.

“Futures will be the key, because if we continue to see fund buying push the board higher, packers may not have much say in the matter and will either have to cut kills or eat more margin,” Vetterkind said.

Thursday cash cattle trade was virtually in the books following moderate trade in the north, along with some clean-up trade activity in the south. Open interest last Wednesday added 480 positions (340,879). Spot October reduced 1,002 positions (33,467) and December contracts increased 167 positions (155,358).

“Fed cattle numbers probably won’t be any larger [this] week as feedlots remain quite current, however, packers aren’t very eager to pay higher money for cattle given the lackluster beef market,” Vetterkind said.
Andy Gottschalk at Hedgersedge.com said that cash trade was mostly $5-6 higher at $119-120 with dressed trade $6-$9 higher at mostly $189-190. Funds continue to plow into the cattle futures complex. The higher cattle futures forced packers to pay off for cash cattle. There is no way to predict the actions of fund managers. One can only acknowledge their presence and impact. Their bias is to the up side, as that is what encourages investors to provide them with new funds.
That said, we will go with a steady cash call following last week’s price advance. Offers should start at $123-124 live and $192-193 on a dressed basis. Meanwhile, retail beef prices at the present time are reflecting an average fed cattle price of $110-111. It would require an advance in retail beef price from the current level of $4.49 a pound to 4.88 per pound to reflect last week’s top of $122 fed cattle price. The challenge to balance of this year and in 2012 will be to hold total demand at current levels, amidst rising retail prices.  
The rapidly rising dollar is having a negative effect on beef exports. Canada has replaced Mexico as the largest buyer of U.S. beef. Fortunately, the yen remains strong and Japanese exports should continue to strengthen. On the import side, the Brazilian real has dropped in value to the dollar, making their beef less expensive on world markets.
The balance between fed cattle and cows in the slaughter mix continues to impact the cutout. We can expect a larger than usual seasonal decline in cow slaughter this year because of the early culling from drought.  
Feeder cattle

Feeder cattle markets were also much stronger.  Grain values dropped earlier in the week to provide cattle feeders some extra incentive to take on more cattle. The latest CME feeder cattle index was at $1.34.99, up $2 from the prior week. Walt Hackney at DTN reported that, “Cheaper corn and lower fuel costs have been incentives for feeder cattle buyers lately and some extra buyer interest has surfaced, particularly in the Midwest, where tough decisions were being made this summer about whether to cut back on cattle going to the feed yards and put more of the harvested crop into the cash market.
Recent findings of extra corn by USDA and harvest estimates that have been reflecting a better crop than earlier expected have combined to put a damper on the higher-flying corn markets. This may all get revised when the crop is harvested, but at present time, there is enough pressure on the price of corn to allow cattle feeders an opportunity to budget feeding rations at a lower level.
Availability remains the principle issue for feeder buyers and with harvest in full swing, yearlings and immediate delivery lighter cattle have been held to a minimum until more buyers finish up their harvesting and enter the market.
Auction markets were all reporting stronger sales last week. In Oklahoma City, feeder cattle steer calves traded $4-7 higher from the prior week. Calves under 500 lbs. sold steady.  Feeder heifers and heifer calves were $3-6 higher. Demand was good, except for un-weaned calves, there was light to moderate demand.
In Nebraska, the fall runs are underway and they report feeder steers under 650 lbs. selling $5-6 higher with instances of up to $14 higher on heavier weight calves. Feeder steers weighing over 650 lbs. sold $1-2 higher. Feeder heifers sold mostly $7-8 higher. Demand was noted as very good, with many buyers attending. — WLJ