Packer losses grow

Markets
Oct 14, 2011
by WLJ

 

Analysts have suggested for weeks the fed cattle market could rally this fall as supplies of market-ready cattle would tighten. Aggressive packer bidding the past two weeks, despite flat wholesale beef prices, is seen as evidence packers are hunting a little harder for the cattle they need, according to analysts.

 

Beef packers are paying near record-high prices for cattle and according to analysts, their shrinking profits could trim slaughter numbers. In addition, the squeeze felt by packers may be passed along to consumers, who could see higher prices for beef at the retail level this winter. The losses could cause beef companies to cut back on the number of cattle they slaughter, which could eventually lead to higher retail beef prices, analysts said.

Cattle producers have sold off livestock in large numbers this summer to avoid high feed costs. Packers capitalized on high volumes and on Aug. 25 were making profits of up to $69.35 per head. As supplies have dwindled, beef packers have paid the price, analysts noted. Last week, packers were reportedly losing as much as $56.20 per head. This is the largest loss since the negative $56.50 per head margin on April 7, 2009, according to HedgersEdge.com. But analysts say that despite their losses, packers are hesitant to pass higher prices on to consumers, fearing they will select alternatives.

Cash fed cattle activity was slow most of the week with bids mostly $117 to $118 in the south and $187 to $188 in the north. Asking prices remained at $123 to $124 in the south and $193 and higher through the north. Open interest last Wednesday increased 13,590 positions (340,922). Spot October fell 1,666 positions (19,359) and December contracts increased 7,419 positions (158,458). There were a few bids that surfaced midweek in the south at $117 live, but producers passed and continued to price their cattle at $123-$124 live and $1.92-plus dressed.

Midweek beef cutouts were steady to higher, up 0.09 09 (Choice $184.99) to steady (Select $169.47) on light to moderate demand and offerings. Choice boxes moved higher later in the week, further widening the Choice/Select spread. Choice cuts moved up to $186 while Select cuts were at $169. The Choice/Select spread continues to be the widest in months at $17.  
On a very positive note for beef, Walmart is making a major move to handle at least 30 percent of their volume of beef sales with Choice beef. Walmart is known for low prices, with most of their beef coming from the Select grade, and they have been losing the majority of their market share to Costco and other competitors that feature a heavier percentage of Choice beef. This is the primary reason the Choice/Select spread has gone up from the typical seasonal difference of $6.
October futures continued to see building pressure as traders focused on rolling out of the front month and into December and February futures contracts, according to analysts. The expectation of additional pressure developing through last week in October futures left the complex under pressure midweek. Widespread open-interest gains in the December through June futures Wednesday indicated that noncommercial trade interest is starting to redevelop following the early week liquidation, according to DTN analyst Rick Kment. Midweek futures closed higher, up 80 to 135 points. Live futures recovered from Monday’s sell-off, supported by short-covering and ideas of tight supplies through the month of October, according to DTN.
October futures held single-digit gains most of the week, although all other contracts softened. With feeder cattle contracts trading from $145 to $147 per cwt. through all 2012 contracts, traders were looking for additional support in the outside markets. Feeder cattle joined in the rally as yearling steers were quoted at $4 to $7 higher. A 750 lb. yearling steer averaged about $138 per cwt., or $1,035 per head.
Feeder cattle
Feed yards have plenty of orders out, which pushed yearling prices higher. Calves are still in good demand, but the absence of grazing and feed supplies in many regions keep the market uneven. Some auctions report calf prices steady to $2 higher while others in drier areas saw bids steady to $2 lower. Still, the market for both calves and yearlings is good given the lack of rainfall and higher grain prices.
The early-October rally in the feeder market counters the losses seen during September. Steer calves weighing 400-500 lbs. averaged $139.20 for the month, down 30 cents per cwt. from August. Yearling steers weighing 600-700 lbs. averaged $126.49 during September, a decline of $3.21 from August’s average. But those same yearlings were selling for $109.93 during September of last year, or $16.56 per cwt. lower.
In Washington, stocker cattle less than 700 lbs. were steady to $5 higher. Feeder cattle more than 700 lbs. steady to $1 lower. Slaughter cows and bulls steady to weak. Slaughter cows were approximately 29 percent of the supply, slaughter bulls 10 percent, and feeders 61 percent of the supply. The feeder supply included 57 percent steers and 43 percent heifers. Nearly 64 percent of the run weighed over 600 lbs.
In Montana, Stocker steers under 600 lbs. sold $1-4 higher; feeder steers over 600 lbs. sold steady to $4 lower. Yearling steers sold steady to $3 lower. Feeder and stocker heifers sold steady to $3 higher. Feeding cows sold mostly steady, however a higher undertone was noted on 2- to 3-year-old cows. Bred cows sold mostly steady on comparable sales. Slaughter cows recovered last week what was taken off the prior week with Breakers trending $3-6 higher. Boners sold $2-3 higher and Lean cows sold steady to $1 higher. Slaughter bulls sold steady to $1 higher. Demand was good for all classes. Approximately, 60 percent feeder cattle; 6 percent feeding cows; 4 percent bred heifers and cows; 12 percent slaughter cows; 4 percent slaughter bulls with the balance misc. cattle. In the feeder supply, steers/bulls made up 58 percent of the run, heifers 42 percent; steers and heifers over 600 lbs. totaled 53 percent.  All bred stock sold by the head and pairs sold per pair, unless otherwise stated.
In Texas, feeder steers and heifers were mostly steady to $2 higher, however, there were instances up to $6 higher on yearlings under 700 lbs. but on a much more limited test than the previous week. Volume was quite a bit lower than the previous week, with all weights having fewer comparable sales and contract volume particularly limited. Six-weight steers and heifers showed the largest increases.
In Kansas, steers reported $4-6 higher but were considered not a true comparison with the previous week’s limited sales, however, a higher undertone was noted, with instances $3-6 higher. — WLJ

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