BSE story shakes futures; cutout values high

Markets
Apr 27, 2012
by WLJ

Very little happened in the cash fed cattle markets last week as Tuesday’s discovery of BSE took the spotlight and market attention. Only pockets of low-volume buying occurred sporadically by midday Thursday.

A few strings sold in the South Plains for $119 live. In the Corn Belt, a small volume of dressed sales sold to regional packers for $194-195. Expectations of lateweek buying existed, though they were hedged citing market reactions to the BSE story.

After starting the week with April live cattle futures at $120.20 and June futures at $115.50, live cattle futures took a sharp nosedive midday Tuesday, closing with April futures at $116.80 and June futures at $111.58, down the 300 limit.

Futures “did not make a fatal swoop to limit-down losses instantly, but progressively worked that way through the last hour and a half of trade,” DTN Analyst Rick Kment said.

The selling pressure pushed June live cattle futures below support values, adding technical selling pressure on top of the rumor. All contracts through December 2012 closed limit down.

“How this was handled by groups in California appears to have greatly exacerbated the futures market reaction,” said Jim Robb, Livestock Marketing Information Center, of the BSE issue.

Futures rallied slightly in the wake of a less sensationalized media presentation of the BSE story, a welcomed change from the reception of lean finely textured beef (LFTB). Word that the case was atypical tempered the reaction of importers of U.S. beef to minimal at best. By Thursday morning, April futures had gained just under $1.50 opening at $118.10. June futures rebounded more modestly, opening at $112.10 Thursday.

Cutout values climbed steadily throughout the week. Choice cutout started off from the previous week at $185.12 and saw $191.07 by midday Thursday. Select cutout climbed similarly, going from $183.97 midday Monday, up to $187.47 by midday Thursday.

“It is unfortunate and misleading to hear many commentators recently mentioning improved beef demand for the recent rise in beef cutout value,” said Andrew Gottschalk of Hedgers Edge. “The only reason beef cutout values have advanced is because of sharply reduced production. A rise in price by itself does not constitute better demand.”

Despite this, optimism and aggressive pricing of cattle is expected to continue into this week as supplies of slaughter-ready cattle are projected to tighten.

The BSE scare aside, packers saw some good news as their margins got back in the black for the first time in a long while. While only three weeks ago packers were losing roughly $100 a head, last Monday saw them losing only $20, and by Wednesday, they were making about $3.45 a head. Analysts project packers will be aggressive about maintaining and improving their margins.

Export trade also got some good news in the form of less than concerned import partners regarding the BSE story. CME had this to say:

“We think the impact of the recent BSE case on US beef exports will be limited. Beef exports in April and May 2006, the two months following the last US BSE case, actually rose 84 percent from the previous year… How Asian markets and Russia respond to this latest outbreak will be critical and we think the response will be restrained. The US is recognized by the World Animal Health Organization as a country with ‘controlled risk for BSE.’ Our trading partners recognize this and trade on this basis.”

Mexico, Canada and Japan were quick to voice their plan to keep importing U.S. beef. Two South Korean grocery stores briefly suspended sales of U.S. beef, but that was short-lived with one retracting the decision shortly thereafter.

Some word came late Wednesday night that Indonesia has halted U.S. beef imports until full information is available regarding the affected dairy cow. Troy Vetterkind of Vetterkind Cattle Brokerage pointed out that Indonesia’s share of the U.S. beef export market is very small.

“So it’s not a big deal but it’s probably the start of a number of small importing countries that will try to undermine the science of the situation in an attempt to hurt the market.”

Overall, export trade last week stood at 15,500 million tons, down 25 percent from the pervious week, but up 30 percent from the four-week average. Importers who increased their purchases were Mexico, South Korea, Russia, Japan and Canada.

Demand for loins and most ground formulations remained strong. Other cuts, such as ribs, round and chuck, held steady. The only areas which saw discounting were imported boneless items.

According to the USDA cold storage report, total red meat supplies in freezers were up 3 percent from the previous month and up 11 percent from last year. Total pounds of beef in freezers were up 8 percent from the previous month and up 14 percent from last year.

Industry slaughter estimates started the week at 603,000 head, but were later adjusted up to 610,000. Day to day saw increased processing rates as compared to the prior week.

Fifty percent lean trim saw a nice rally last week. Ending the previous week, 50 percent trim stood at $68.25 but had jumped up to $88.02 by Wednesday. According to CME, the rebounding prices of 50 percent trim can be attributed to packers cutting back on slaughter and the waning effects of the negative LFTB stories.

Ninety percent lean trim saw a steady climb due to the strong demand for ground beef formulations. It began the week at $222.64 and by Thursday morning, had reached $225.20.

Feeder cattle

Ranchers are busy winding up their calving season in many areas, with the southern-southwestern areas primarily finished, and the western-northwestern areas anywhere from 65-90 percent completed. The year 2012 will go down as one of the most favorable years on record for calving and if ranchers can control their health issues, the death loss issue should be minimal this year, according to DTN’s Walt Hackney.

“Any extra calves on the ground and healthy will definitely be a plus, financially, for ranchers this year, with calf prices at record prices and prospects for fall delivery calves looking to be in high demand.

Yearling availability, for spring and summer delivery, will go down as one of the most limited inventories in history, and with feedlot prices, buyers will be active all spring and summer finding adequate inventory for open pens,” Hackney said.

“Ranchers, habitually interested in contracting fall delivery calves, need to be aware that ‘hogs usually end up in the packinghouse,’ and greed can be their very worst enemy!” Hackney added.

The cattle and calves sold were all over the board this week, with some instances of $5 higher and other areas on the opposite end with as much as $10 lower. Feeder buyers pushed price levels to fill a few more vacant pens before marketing slows to a crawl as producers turn their attention to corn and soybean planting in the Midwest, wheat harvest in the Southern Plains, and hay production across the southern tier of the U.S.

Everything is running ahead of schedule so far this year, from cattle being turned out to farm production, which, if all goes well, should increase efficiency and maybe an extra cutting of hay or double cropping on early harvested wheat fields.

In Oklahoma, feeder steers and heifers closed mostly steady. Stocker cattle and calves were steady to $2 higher. They saw a nice run of feeder cattle moving off wheat, with mostly average weigh-ups and mostly average flesh conditions.

In Wyoming, feeder steers and heifers sold steady to $5 higher, except in Riverton, where they were $2 lower and in some instances, $6-10 lower.

In Washington, feeder cattle for current and calves for fall delivery were steady to $2 lower. — WLJ

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