Packer purchases bolster cash market

Markets
Feb 24, 2012
by WLJ

Fed cattle prices jumped to their highest levels in history a week ago, as short-bought packers purchased for the short slaughter week. Sales in the south ranged between $128 to $129.50, mostly $5 higher than the previous week. Dressed deals in the north were mostly $203, or $6 higher.

Futures prices for cattle leveled some by midweek, waiting for market signals, although optimism from the previous week’s advances did carry over with a few offers at $132 in the south.

Cash cattle were called steady to $2 higher midweek. Cattle buying interest was expected to close the week closer to steady money with the previous week (i.e., $128/203). Yet bullish feedlot managers continued to resist packer bids of $126 live and $2 dressed. Most yards remained priced at $132-134 live and $2.08 plus dressed.

By midweek, a few cattle had sold in Iowa for $126 live and some Holsteins at $1.96 dressed.

In the Texas Panhandle, the previous week, live sales sold at $129. In Kansas, live sales sold at $128. In Nebraska, live sales sold from $127-129.50 with dressed sales at $203. In Colorado, live sales sold at $129.

Auction receipts the previous week near these areas were very light as snow, drizzle and fog hampered livestock transportation.

Packer bids in the 5 Area direct feedlot region sprung from $122 to $128 Feb. 17 as feedlots took advantage of the short-bought situation and reduced chain speeds that finally caught up with the U.S. beef processing industry.

This allowed the fed cattle market to once again set new record highs (most recently set in late November) with live sales from $128-129.50 and dressed sales from $202-203.

“Fed cash cattle prices posted gains of $3-5/cwt live, at $127.50-129.50. Corn Belt prices ranged from $203-205, up $5/cwt. With funny money in the deliveries and funds driving futures higher, the likely trend is steady to higher; funds will dictate direction and size. Our price high for the year is projected at $136-137 live. We originally projected this to occur during the second quarter. It now appears as though the market wants to price in all the ‘good’ right now. Certainly the carcass weight data, advancing rapidly contraseasonally, would argue against additional price gains now. However, as previously stated, with funny money playing around in the futures delivery process and new longs being added almost daily by funds, the trend will likely remain up. Such action will only exacerbate the eventual (and inevitable) correction,” says Andy Gottschalk with HedgersEdge.com.

Futures closed mostly 2 to 45 higher midweek. Remarkably, live futures continued to set records on a daily basis most of last week. “Nearby contracts especially proved attractive to buyers, a fact no doubt tied to record cut-outs and live sales, as well as expectations for more of the same,” according to DTN analysts.

“Funds have a lot of long open interest in the cattle market, and in terms of the feeder cattle market almost half of the long open interest, so need to be careful of some long liquidation here. Keep an eye on your support areas to let the market tell you what it wants to do. That support comes in at $130 in April live and $157 in March feeders. Below that is $128 in April live and $155 in March feeders. A close below those lower support levels would be bearish in my opinion and could lead to a hefty round of long liquidation,” says Troy Vetterkind of Vetterkind Cattle Brokerage.

CME cattle futures had impressive gains through the previous week with most live quotes over $130 and feeder contracts mostly over $160.

But, according to CME reports, traders remain nervous that higher gasoline prices will eat into the beef demand this year and this, along with bearish news on cold storage, put some pressure on markets midweek.

Boxed prices increased $2-3 as some evidence of improving demand was apparent. The Choice cutout was at $197 up $3 and Select gained $2 at $193. Last week’s advance in boxed prices represents the largest to date of the new year.

“The advance in the cutout values is being forced by production cuts, which in turn will only force retailers to accelerate their price advance to restore margins— end result is to further jeopardize consumer demand.

Weakening ‘Demand,’ not supply, remains the greatest risk to this market. Statistical data will not confirm slowing demand for at least two full quarters. This is so due to the lag in retail prices. Demand erosion will result more than last year at this time,” Gottschalk said.

Slaughter numbers were 616,000 for the past week compared to 603,000 the previous week, compared to 654,000 head last year. The shortened production week helped to boost boxed beef prices. Beef production yearto-date was down 5.2 percent from the previous year.

At midweek, the kill was running 15,000 head below the previous week’s pace as packers continued to keep the breaks on production.

“Smaller showlists and higher boxed beef markets should mean that cash fed cattle trade at least another dollar or two higher this week. Cash feeder cattle markets were mostly $1-$3 higher [Wednesday] with slaughter cows taking on more of a steadier tone,” Vetterkind said.

“We are approaching alltime highs on the Choice cutout at this $1.98 area so again it will be interesting to see how we handle this area. The beef markets are moving higher but it is certainly a forced trade that takes deep production cuts to do so. Cold storage numbers were released [Wednesday] with beef stocks estimated at 482.070 mil lbs which would be 4 percent above the previous month and 5 percent above a year ago,” Vetterkind added.

Feeder cattle

Placements in feed yards for the first two weeks of February are above last year, to some analysts’ surprise. Restocking droughted out pastures in the southwest will require a lot of cattle. This may leave a very small pool for feedlot replacement.

Cattle feeders usually buy cattle if they can afford them and hope the market will go up. Some pens won’t be filled at any price. This will force a contraction of feeding capacity, according to analysts.

“Feeders cattle receipts were estimated at 337,700 head versus 287,600 head the prior week and 421,000 head last year. Feeder prices were mostly firm to $3/cwt higher while calves traded mostly $2-6/cwt higher. Replacement breakevens for fed cattle are in a range exceeding $140/cwt. Any trend reversal in fed cattle prices could quickly undermine support for feeders.

Many replacement feeders have losses bid in as fed cattle exceeding $100 per head. Beware of any market when everyone is convinced prices can only go in one direction—up. Stay informed; always manage your financial risk,” Gottschalk said.

Feeder steers and heifers sold firm to $3 higher well before the fed cattle market experienced sharp gains during the previous week’s Friday afternoon trading session. Southeastern calf markets and old-crop stockers throughout the balance of the country traded $2-6 higher, but early arrivals of soft new-crop fall calves in the Plains and the Midwest were very uneven.

Some areas of the central U.S. are continuing to see further price advances on the young pee-wee calves while other marketing areas are reporting trends up to $8 lower, even on top quality steers. No doubt, the best demand is presently for short-yearling 500-750 pound stockers possessing a relatively thin condition, plus the stretch and frame that grazers know will yield efficient weight gains on early grass.

This is typical for March and early April, but supplies are so tight and the weather has been so mild that these types have been high priority all winter.

Calls for stocker calves have been pouring into southeastern order buyers with the cumulative weighted average price across Dixieland for 400-500 pound steers up to $184.87, 500- 600 pound steers averaged $168.69 before freight, commission, and additions.

Last summer’s drought remains fresh on the minds of producers in the Southern Plains; but many locations across Texas, Oklahoma and Kansas have received bountiful moisture over the last few months and greener pastures may well be a reality as temperatures rise.

The most recent CME cash feeder cattle index is on the rise and nearing $156 even without the inclusion of a fancy consignment of five big pot-loads of 787 pound steers that brought $160.10 at the Hub City Livestock Auction in Aberdeen, SD.

In Kansas, steers were steady to $2 higher. Many buyers were aggressive to own cattle for future delivery. Weather in Kansas last week brought mostly overcast skies with an early week storm front moving through bringing rain and some snow to parts of eastern Kansas. Western Kansas missed out on most of the moisture the previous week. Temps were mainly in the upper 30s and 40s. Sales confirmed on 10,150 steers, 4,461 heifers and 1,077 calves for a total of 15,688 head compared with 7,291 the previous week and 6,163 last year. Volume included 93 percent 600 pounds and over, 7 percent 600 pounds and under with 43 percent previously contracted cattle. Feeder supply were 72 percent steers and 28 percent heifers. — WLJ

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