Fed cattle trade softens ahead of inventory report

Feb 3, 2012
by WLJ

Anticipation of last week’s winter weather sparked an early rally on Tuesday. The much anticipated winter storm in Colorado, Kansas, Nebraska and Iowa bolstered feedlot offering prices.

Cash fed cattle markets were lightly tested last week, with a few cattle selling in Iowa at $124-126 live and $1.96-1.98 dressed. There was some softening in the beef markets and futures contracts traded lower for much of the week, lending to last week’s price decline.

In the Southern Plains and Nebraska, live sales sold at $124 the previous week. In Colorado, live sales sold at $123 and in the western Corn Belt, live sales sold from $123-124 with dressed sales at $200.

Fed cattle selling in the auction markets of Minnesota, Wisconsin, Iowa and South Dakota have been trading steady to $.50-1 lower compared to the same sales the previous week.

“Demand,” not “supply,” remains the greatest challenge confronting this market. Carcass weight data for the second consecutive week showed signs of marketings not keeping pace with the increasing supply of market-ready cattle. The perfect witch’s brew combining higher replacement costs than the current selling price, fed cattle selling prices above the cost of gain, and a premium futures structure provide reasons that some producers may choose to defer marketings. The annual cattle inventory report contained few surprises. Total inventories were reported at 98 percent of the prior year. Heifers for replacements were up, while dairy heifers for replacements were down. Cattle inventories have been in decline since 1975. However, the decline in cattle inventories has been almost totally offset by rising carcass weights. Beef production has not declined commensurate with the decline in cattle inventories.

We continue to believe that USDA has underestimated production this year by approximately 700 million pounds. For the latest reporting week, exports were up only 3 percent from the prior year. “Technically, the cattle and feeder complex is ‘overbought,’ which should limit rallies,”said Andy Gottschalk with HedgersEdge.com.

Cattle futures did what they were supposed to do midweek, according to Troy Vetterkind with Vetterkind Cattle Brokerage. “Traded higher all night, broke hard on the open of the pit trade, held support at $128 in April live and $154 in March feeders and rallied going into the close. Someday this isn’t going to be the case and we are going to see a bigger break for a day or two. Support levels for both these front month contracts moves up to $128.20 in April live and $154.30 in March feeders. Remember we need to hold these price levels on a closing basis. Option trade was moderate with downside put buying noted early, buying puts and buying futures, buying calls and selling futures, and a big feature of ADM selling over 2,000 August live $136 puts around the $8 level. ADM also bought 800 June $128 and $126 puts for $3.90 and $2.90 respectively. Advantage bought 500 August $122 puts vs. futures at $129.20, and Rosenthal bought right at 1,000 October $126 puts vs. June futures. Cattle option volatility went up about 0.25 percent in April at 13.15 percent, went down 0.25 percent in June at 12.28 percent, and held steady in August at 12.40 percent,” Vetterkind said.

Live cattle traded mixed, but saw some renewed buying interest. Outside markets were supportive as well as suggestions that country sales would eventually be no worse than steady with last week (i.e., $124 in the South, $199-$200 in the North).

Monday’s kill was 114,000 head, Tuesday was 125,000 head, and Wednesday’s was 124,000 head with last week’s total running 6,000 head below the previous week’s pace.

The weekly slaughter number has moved from 650,000 to 625,000 to 600,000 in three weeks as packers react to poor margins.

“Beef markets haven’t been much of a help for the packer [last] week. While higher, they are not high enough to compensate for $80-$100 per head losses on slaughter margins,” Vetterkind said.

Boxed beef prices showed signs of a rally, midweek, following the cut in the slaughter. The primary feature of recent trading has been the seasonal decline in the Choice/Select spread. The Choice cutout was quoted at $184 and Select at $179. The spread was quoted at $5.

Compared to the previous week, feeder cattle prices were firm to $5 higher (mostly $2-5 higher) with the full advance on the 650-850 lb. short-yearling types.

Much of the current offerings will soon be celebrating their first birthday and possess a long-weaned condition that will allow them to perform like true yearlings, which have been scarce for the last few months.

The unbelievably mild winter throughout the central portion of the country has been ideal for cattle growing, with efficient weight gains posted at every level of production.

Stocker and feeder prices continue to reach new milestones each week as buyers of these cattle reach deeper into their pockets. The purchasing of grass stockers is in full bloom even though the first signs of green grass are at least 60-90 days out.

The fact is, most stocker buyers admit that they would be even more aggressive for turnout cattle if they were assured that the balance of the winter would continue mild. The market has already surpassed most lofty predictions and the trajectory of the gains has cattlemen hoping that we are currently climbing a plateau rather than a mountain peak.

But, there still seems to be enough fundamental support to reasonably hold price levels once the feeder cattle market reaches its full potential.

Naturally, the demand for replacement quality heifers is spiking with over 400 head selling through the regular feeder cattle auction in Bassett, NE, with an average weight of 692 lbs. and an average price of $183.59, or over $1,270 per head.

Last week’s high steer quotes were also found in upstate Nebraska with two loads of drug-free source and age verified 650 lb. steers at $187.75, and another load weighing 730 lbs. at $176.50. — WLJ