Packer margins remain sharply negative

Markets
Oct 29, 2011

Despite the lower cutout values last week, fed cattle prices were higher. The fed cattle market strengthened at $1 to $2/cwt. higher last week with sales at $120-121 in the south Plains and $120-122 in the Corn Belt. Dressed sales were reported at $189 to $192/cwt.

“Given the enthusiasm and ‘hope-ium’ from the general market rally following the announcement of a ‘comprehensive package’ rectifying the European debt issues, cash cattle offerings returned the higher levels,” according to Andy Gottschalk with HedgersEdge.com.

Dressed trade was $2 -3 /cwt. higher at $190-192/cwt. The cash trend bias was steady to higher. The cattle complex is approaching an “overbought” condition, which could limit gains from current levels, according to analysts. “The latest Cattle on Feed report has not altered our outlook for higher prices in 2012,” Gottschalk said.

Finished cattle prices are expected to trade in the low-$120s for the rest of this year and increase modestly in the winter, according to analysts. The 2012 spring price rally is expected to increase prices to the higher120s for March, April and May, with summer prices cooling to the mid-$120s. Record annual prices are expected for 2012, averaging in the low to mid $120s compared to the previous record which will be set this year near $115.

Last week’s cattle slaughter totaled 651,000 head, up 0.2 percent, or 1,000 head, from the previous week and down 669,000 head, or 2.7 percent, compared to the same week last year.

Auction receipts totaled 288,200 last week, up from the previous week’s total of 245,000. Last year’s total was 278,000.

Futures settled lower midweek. “Part of the selloff can be contributed to the ongoing roll of December long forward, but also I think the grains and livestock sold off sharp going into the close on concerns over the financial well-being of a major futures clearing firm in Chicago/New York after the company’s stock lost 70 percent of its value in the last two days,” Troy Vetterkind, Vetterkind Cattle Brokerage, said. “We got December live cattle down into some pretty good support [midweek] at $120 and given my ideas of a stronger cattle market for at least another week or two, I think we can expect to see a bounce higher off that support going into next week,” Vetterkind said.

The October live cattle futures contract ended the previous week contract ended the previous week at $121.97/cwt., up 27 cents from the prior week’s close. December fed cattle lost $1.05 to end the week at $122.15/cwt. February live cattle futures settled at $124.80/cwt., down 57 cents.

April 2012 live cattle futures moved $2 per cwt. higher in September and have since added another $2 in October. On Oct. 21, April 2012 futures approached $130.

Packer margins remained sharply negative, as much as $56 per head. “Nothing much has changed in the fundamentals of the cattle market; numbers remain relatively tight, beef sales are reportedly improving in forward timeslots, which gives packers incentive to own cattle process as the kill is running 4,000 head above last week,” according to Vetterkind.

The U.S. dollar reached a record low against the Japanese yen last week with only 76 yen needed to buy a dollar. The dollar is the weakest against the Chinese yuan of anytime since 1993. A weak dollar helps boost U.S. exports, but makes imports more costly. Both U.S. beef and pork exports are expected to set annual records this year.

Foreign markets are buying a record amount of beef at record high prices, according to analysts. USDA now expects a record 2.7 billion pounds of beef to be exported this year, representing a record 10 percent of domestic production. A new record is expected to be set next year with 11 percent of production moving to foreign consumers. In sharp contrast, in 2007, only 5 percent of production was exported when the U.S. was still in the grips of lost exports due to BSE discoveries beginning in late 2003.

Weekly beef exports have trended below year-earlier levels. Analysts say it is possible export gains have peaked. Exports for 2012 are expected to grow at a slower pace than the past two years.

Boxed beef prices were mostly flat to slightly lower. Choice boxed beef was quoted at $184/cwt., $1.27 lower than the previous Friday.

Select was quoted at $167, down $1.89 from the previous week. The Choice-Select spread was $16.54. Meat remains a tough sale, according to Gottschalk. “Some items are carrying the load for the entire carcass and cutout,” he wrote. Beef product continues to be led by ground beef, while muscle meat sales remain lethargic.

The positive impact of Wal-Mart’s nationwide roll-out of Choice beef offerings in conjunction with their Select offerings is on schedule for completion at the end of this month. Local Wal-Marts have allocated approximately four feet of counter space to Choice offerings. Choice strips were priced at $9.98/ lb. while Select was priced at $8.68 per pound, according to Gottschalk.

Retail beef prices were record high during September for the second consecutive month. Choice beef in grocery stores averaged $4.914 per pound, up 4.2 cents from August and 48.9 cents higher than in September 2010.

Total red meat supplies were up, while total frozen supplies of poultry were down from last year as of Sept. 30, USDA said in its monthly Cold Storage report.

Red meat was up 5 percent from August and up 12 percent from the previous year. Total pounds of beef were down a bit from the previous month but up 8 percent year on year.

Looking ahead, estimated cow/calf returns in 2012 should at least match 2005’s record (about $150 per cow). Preliminary forecasts for 2013 suggest returns will set a new record high (exceeding $160 per cow) because the up trend in calf and cull animal sale prices are forecasted to out-pace production cost increases, according to Livestock Marketing Information Center reports.

Feeder cattle

Feeder cattle and calf markets saw an increase in prices and a strong demand. Yearling feeder cattle prices were firm to $5 higher, and the market for calves was $3 to $6/cwt. higher, with instances of $8 to $12 higher.

According to Gottschalk, the feeder and calf complex remains in a long term “bull” market. As of Oct. 1, the feeder and calf supply outside feed yards is calculated at minus 1 million head versus last October. The Sept. 5 area live weight price for slaughter steers averaged $117.50/cwt.

Total cattle on feed numbers were 10.73 million, up 5 percent from last year. Placements during September totaled 2.469 million head, 100.2 percent of the 2010 number. Marketings totaled 1.813 million head, 100.6 percent of year ago numbers.

The numbers of cattle under 600 pounds placed on feed the past three months are the largest in that weight category in USDA records.

True grass yearlings are now very scarce, but traded from firm to $5 higher where available. The southern Plains are reporting yearling-weight calves (that were drought-displaced into growing yards) currently hitting the direct market and getting the cold shoulder from prospective feedlot buyers. Due to hay shortages, these calves were fed a much hotter ration than usual, putting them in a fleshy (fat) condition that promises an inefficient performance on full feed and a stalling-out at an immature and lighter weight.

The loss of tonnage from these drought-affected calffeds could offer yet another bullish signal to the already testosterone-induced spring fed cattle market that has April CME Live Cattle contracts trading at a $4 premium, the all-time record high.

Out-front feeder cattle futures contracts are also running ahead of current cash levels with winter and spring delivery of 750 lb. steers tickling $150. This has caused backgrounders to increase the throttle on their bidding hand, especially north of Interstate 70 where a hard frost fully encompassed that portion of the nation last week, bringing more consistent temperatures and more confidence in the health of new calf purchases.

In Wyoming, western Ne braska, and western North and South Dakota, steer and heifer calves sold $2-8 higher, with instances of $10-14 higher; yearling steers and heifers sold $2 -6 higher. Demand was very good. Direct trade was slow last week. Unless otherwise noted, direct prices are current FOB with a 2-3 percent shrink or equivalent, and with a 5-10 cent slide on calves and 3-6 cent slide on yearlings from base weight. Steers made up approximately 55 percent of the total receipts, heifers 45 percent. Offerings over 600 lbs. totaled 26 percent. Direct sales accounted for 800 head of the total receipts.

In Kansas, compared to the previous week, feeder

steers and heifers were steady to $3 higher. Approximately 84 percent of the week’s cattle weighed over 600 lbs. Feeder supply was 75 percent steers and 25 percent heifers.

In Colorado, steers mostly traded $2-5 higher, with instances $5-9 higher. Heifers under 600 lbs. mostly sold $2-6 higher, with instances $7-10 higher. Heifers over 600 lbs. sold steady to $2 higher. Buyer demand was good for all classes, except moderate for non-vaccinated, unweaned offerings. The supply consisted of 59 percent steers, heifers 40 percent and 1 percent bulls.

Feeders over 600 lbs. made up 27 percent of the total supply. — WLJ

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