Record losses for packers

Dec 16, 2011
by WLJ

The fed cattle markets were slow to develop again last week. The futures markets were under pressure from outside markets and the beef cutout was declining leading into the holiday season. Packers’ negative margins continued, and reduced beef slaughter schedules were being implemented in an effort to raise the wholesale beef cutout price.

Cattle feeders were patiently waiting for some improvements in market conditions to hold fed cattle prices steady, but have a positive basis to the futures. They will be eager sellers when the time comes, according to analysts.

For the most part, negotiated cash trade remained at a standstill.

A few cattle traded in the north at $195 midweek. In the south, sellers remained priced at $122. Trade was expected to come in Thursday afternoon at $192-193 in the northern Plains.

U.S. live cattle futures opened sharply lower Monday of last week as lower cash sales and falling wholesale beef prices added to pressure from a global selloff in stock and commodity markets.

Cattle for December delivery fell 1.05 cents, or 0.9 percent, to $1.1725 a pound in trading at the Chicago Mercantile Exchange. The CME February contract fell 0.9 cent, or 0.8 percent, to $1.1755 a pound. January feeder cattle futures fell 0.75 cent, or 0.5 percent, to $1.4135 a pound.

Cash cattle had yet to trade by midweek, with packer bids at $117 and offers at $122-$125. Cash markets were lower for the duration of the previous week, and estimates for profit margins at meat packers pointed to more pressure, according to analysts.

“I still don’t see a whole lot of good in the cash cattle markets right now with the exception of slaughter cows. Boneless and ground beef demand is still pretty robust and imports are light, which, along with the market being past peak fall cow numbers, is going to keep some support under the cows,” Troy Vetterkind, with Vetterkind Cattle Brokerage said.

Although cattle prices are falling, which supports packer margins, wholesale beef prices have also been weakening. USDA said Choice beef prices closed down the previous week $1.31 at $185.14 per cwt. while Select slid $1.44 to $170.18 per cwt.

U.S. beef packers continue to experience record losses as the price they pay for cattle is outstripping what they earn on beef, according to analysts.

Analysts said the losses could force beef producers to reduce cattle slaughter and beef production in an effort to lift beef prices.

Last week, estimated the average beef packer’s bottom line at a negative $101.95 per head of cattle, the worst since the company began keeping records 22 years ago.

The last time beef packer margins were positive, according to Andy Gottschalk with, was on Sept. 15 at $2.60 per head. Cattle prices were then around $117 per cwt. and wholesale Choice beef was $185.20 per cwt. Packer margins this year peaked at positive $104.10 on June 2.

An unusual surge in Choice beef demand by restaurants and retailers, most notably Wal-Mart, delayed the typical slowdown that occurs at summer’s end when outdoor grilling winds down.

That rush for Choice cuts launched cash cattle prices to a record of more than $120 per cwt. on live cattle and sent wholesale beef to all-time highs in the fall.

Another sore spot for beef packers is the deflated dropcredit value, or what processors make from the sale of non-beef byproducts such as hides, fat and tallow. The majority of that value is tied to the hides which are shipped outside the U.S.

Gottschalk estimated the current drop credit value at roughly $170 per head, compared with $185 to $190 per head earlier this year.

Choice box prices leveled out midweek following a $4 gain on Monday. The Choice cutout was quoted at $189 and Select posted a small gain to $172. The spread fell to $17. The Choice/Select spread is expected to narrow in the coming weeks but remain well above historical levels, according to some analysts.

“I continue to believe that middle meats coming off of historic highs are going to pull overall cutout values lower into the end of the year despite some interest for end meats and boneless beef during the same time frame,” Vetterkind said.

Cash markets fell rather sharply the previous week as cattle traded in Texas and Kansas at $1.20 a pound, or 4 cents a pound lower than most sales last week. Cattle traded hands in Nebraska at a mix of $1.20 to $1.21 a pound live and $1.95 a pound dressed.

Demand from packers is likely to fall against steady supplies in coming weeks as packers are likely to use thinner slaughter schedules due to consecutive holidays for Christmas and New Year’s. Demand also typically faces a lull after packers finish filling holiday orders for retailers and foodservice customers.

Feeder cattle

Feeder cattle sold mixed across the country as weath er and lighter receipts played a part in trading. The feeder index was at $145 midweek, or $3 higher than January futures. Some short wheat fields may force early sales of feeder cattle after the first of the year, analysts say.

“On the weather front, the feeding sector has experienced generally excellent feeding conditions. This is in sharp contrast to last year. If this industry manages to get through mid-December without any significant adverse weather, it generally bodes well for the balance of the winter feeding period,” Gottschalk said.

The holiday season is typically a quiet time for trading in stocker and feeder cattle. A 750 pound feeder steer is selling for $145 in the south.

Feedlot replacements that are so tightly bound to the futures market saw a noticeable drop in demand near the southern Plains feedlot region, but new northern feeding interests continue to enter the market and held losses in check. In Bassett, NE, last Wednesday, buyers bid up nearly 650 head of top quality 6 weight weaned steer calves with an average weight of 636 lbs. to an average price of $168.46.

Lighter weight calf interest continues robust with help from the surprisingly lush winter wheat pastures in Oklahoma, following such prolonged drought suffering. But bitter cold temperatures are starting to set in and wheat sprouts have a tendency to stall during cold snaps, if not try to crawl back into the ground altogether.

In the northwest direct feeder cattle market, stocker and feeder cattle remained steady in a light test. Trade developed slow to moderate early, then very slow late as all commodities turned bearish on the futures markets.

Demand was good early, light late. The feeder supply included 47 percent steers and 53 percent heifers.

In Oklahoma, compared to the previous week, feeder steers were $1-4 lower, with the least decline on 700-800 lbs. steers. Feeder heifers were steady to $2 higher. Steer and heifer calves were $2-5 lower. Demand was moderate for all classes, except good for feeder heifers.