Higher boxed beef cutouts

Nov 18, 2011
by WLJ

At press time, the fed cattle had yet to develop but the previous week´s market posted record highs by selling $2-6 higher from $124- 127. The last record high was posted earlier this year during the first part of April.

Trade was steady to lower last week as packers prepared for a short production week. Production struggled to exceed 630,000 head.

Beef product movement was good during the previous week, but with a noticeable slowdown in weekend sales, according to Andy Gottschalk at HedgersEdge.com. Beef cutouts continued to advance following the previous week’s reduced production at 625,000 head, down from 648,000 head the prior week and compared to 661,000 head a year ago.

Troy Vetterkind, with Vetter kind

Cattle Brokerage, said, “The lower kills have been very supportive to the cash beef market and getting cattle bought cheaper this week will go a long way in improving processing margins, which should help support the cash cattle market next week after Thanksgiving.”

According to Gottschalk, for retail margins to recover, beef cutout values must decline. “The current retail beef price is only reflecting $111 fed cattle. There is a huge disconnect between the current cash and current retail price,” he said.

“Unless the consumer is willing to pay a lot more money for beef, production levels will need to be cut. The current disparity clearly suggests that, at current production levels, consumers are willing to pay more for your product. Lower production levels will support higher cutout values, which in turn will necessitate a rapid and sharp advance in retail beef prices,” he added.

Beef exports declined below year earlier levels for the previous week. Gottschalk said that Y/Y gains in weekly beef exports and beef demand may have peaked.

The cash market is now trading at a huge premium to the spot December CME Live Cattle contracts, but April futures are even higher, which is prompting cattle feeders to pay big money for high performance replacements, according to USDA reports.Cash trade was $5-6.50/cwt. higher in the south Plains, at $124-125.50, while dressed trade in the Corn Belt was in a range of $200-202.

Packers were purchasing for the holiday-shortened production this week. Recent sharp gains have led to steady to lower prices leading up to the holidays. “This industry should gradually encounter an increase in fed cattle supplies from mid– November. On a positive note, the fed cattle sector remains ‘current,’ with little threat of any backlog developing in the foreseeable future,” Gottschalk said.

Packer bids of $120 were refused and most asking prices remained closer to $125. With an expanded show list, December futures recovered from last Monday’s lows of $119, coming in above $121. Last week gave processors the first opportunity to build margins by reducing live costs and posting good gains to box prices, according to analysts.

For weeks on end, analysts have continued calculating and estimating losses by beef packers of between $50-75 head.

The mix of cows in the weekly slaughter continues to change. Cow slaughter is up from last year as droughtimpacted areas liquidate cows. But surprisingly, fed cattle slaughter is running under the prior year. With summer placements well above last year, previous weeks reports showed 470,000 head of fed cattle slaughtered compared to 503,000 last year.

The previous week, December closed on a weak note, following the advance in fed cattle prices. Following an upside breakout on “Weekly Charts” the previous week, the failure to follow through last week is a large red flag, according to analysts. “Is this a precursor to a top in cash prices for this period and lower prices into the first quarter?” Gottschalk questioned.

Last week’s surprise came in the form of a sharply higher boxed beef cutout. Daily gains of $1-2 left the boxed prices well above the previous week. The Choice/ Select spread saw $17 midweek. Choice cuts were up $1 quoted at $195.50 while Select cuts were up $1 at $176.50.

There has been much talk over the last month about Wal-Mart’s decision to offer Choice beef products in all 3,800 of its stores which previously only carried Select. This has helped widen the Choice/Select spread and should prompt feedlots into altering their programs to produce more high quality carcasses, perhaps more days on feed, more predominantly English feeder cattle, and less use of growth promoters and high performance feed additives, according to USDA.

According to Vetterkind, there is still active interest in procuring Choice middle meats ahead of the holiday season and this will be key for keeping cutout prices at current values going into the first of December. But keep in mind that a lot of business that will deliver for first of December feature ads and for the holidays has already been done.

Last week’s reported auction volume included 32 percent over 600 lbs. and 40 percent heifers.

Last week’s export sales were reported at 11,128 metric tons, which would be 27 percent below the five-week average.

Total U.S. cattle imports for 2011 are forecast by US- DA to be 2.05 million head—10 percent lower than 2010. Canadian cattle imports through September, however , are 40 percent lower than 2010, the agency said last week.

Canadian slaughter cattle have been priced high enough that there has not been a strong incentive to export cattle to the U.S. As a result, the number of cattle imported from Canada for immediate slaughter was 35 percent below a year ago, through September, the agency reported.

Feeder cattle imported from Canada on average make up one-third of total Canadian imports. Feeder cattle imports (cattle less than 700 lbs.) through September were 47 percent below year-ago levels.

Cattle imports from Mexico are 25 percent above year-earlier levels, USDA said. Cattle imports from Mexico are primarily all feeders. On average, nearly 53 percent of cattle imported from Mexico weigh less than 400 lbs. and only 1 percent weigh over 700 lbs. With tight cattle supplies in Canada and Mexico expected in 2012, U.S. cattle imports are forecast at 2.025 million head, USDA said.

Fall wheat grazing in the south Plains area remains limited, with some improvement expected in the new year.

Grain prices were lower for the week, despite USDA slightly lowering yield estimates for this year’s corn and soybean harvest. Higher oil prices in the past couple of weeks have stimulated another boost in ethanol demand. The basis in Oklahoma is 90 cents over December contract. Corn is now pricing into most rations at $13/cwt.

Feeder cattle

A historically tight feeder and calf supply will continue to limit downside selling pressure.

Feeder and calf receipts were estimated at 416,000 head versus 422,000 head last year. Prices were generally steady to $3/cwt. higher on calves. The CME Feeder Index is at an all-time high.

Feeders must now rely on replacements from grow yards because of depleted pastures. In late summer and early fall, higher feeder futures and relatively low priced stocker cattle allowed for a generous margin to grow in the yards, according to analysts. These cattle are expected to be hitting the feed yards for finishing in the coming weeks.

Feeder cattle prices will find their price limit when boxed beef prices find their limit, according to analysts. The benchmark 750 lb. steer was selling for $144.

Compared to the previous week, a continued heavy offering of spring-born calves and the remaining supplies of true “green-conditioned” yearling feeders sold firm to $3 higher, according to USDA reports.

“The cash feeder trade remained $2-$4 higher at most of the major auction markets yesterday. That said, margins on feeding yearling steers and 500-600 lb. steer calves is starting to run out of room and look to be a breakeven at best given current costs of gains at $1.15-$1.20 depending on location and whether or not risk management was done on feed costs,” Vetterkind said.

Price levels continued to mount as it was the seventh consecutive week that nationwide feeder cattle prices had been predominantly higher. The CME Feeder Cattle Index, which is based on all the reported 650-850 lb. steers marketed through the central U.S. 12-state region, reached another new all-time high the previous week of 142.43. Regional record highs are being broken each day on varying classes in auction markets around the country, especially on lightweight calves (steers under 550 lbs. and heifers under 500 lbs.) and the rare loads of grass yearlings.

Feedlot replacement buyers are spurred by the bullish fed cattle market and lightweight calf backgrounders understand that middleweight growing cattle will be in short supply next spring to put on grass and turn into hard mid-summer yearlings.

However, demand continues rather sluggish on heavier calves (550-700 lbs.) as they will be too heavy to turn out after they have been taken through the winter.

In South Dakota, feeder steers and heifers were steady to $3 higher, with yearling heifers 750-900 lbs. $5-10 higher. They saw very good demand for both calves and yearlings.

In the Washington, Oregon and Idaho area, stocker and feeder cattle were steady in a light test. Trade remained slow to moderate as most local sale barns are still having special sales. Demand was moderate to good for yearlings after the first of the year. Feeders were 100 percent of the supply. The feeder supply included 86 percent steers and 14 percent heifers. Nearly 86 percent of the supply weighed over 600 lbs.

In Kansas, steers were firm to $4 higher, with not enough heifers for a test. True yearlings continued to be very difficult to find. They saw some rain, a little less than an inch in the Dodge City area; the central areas of the state 1-2 inches, south of Wichita, around the Oklahoma line, 3-5 inches were reported, far from a drought buster for most of the state. Sales were confirmed on 3,795 steers, 1,011 heifers and 1,376 calves for a total of 6,182 head compared with 2,577 the previous week and 3,302 last year. — WLJ