Futures rally but CME changes cause concern

May 4, 2012
by WLJ

Concern over soft domestic beef demand mixed with uncertainty over the future to create a holding pattern in cash fed cattle trade last week. Bids and asking prices were frequently separated by $3-5.

By midday Thursday, only sporadic trading had taken place. A handful of dressed sales occurred Monday at $193-194 in Iowa, and light trade developed in the north at $120 live and $188-191 dressed later in the week. Kansas and Nebraska saw token buys at $117 live and $188 dressed.

Last week saw April futures expire at $118.75. June and August futures started the week off low—opening Monday at $113 and $115.55, respectively—and stayed that way for most of the week.

Sharp gains developed midday Thursday with June futures jumping over $3 from its Thursday opening of $112.75, seeing a high of $115.88. August futures had a similar sudden jump, opening at $115.80 and seeing a high of $118.28. All deferred futures also saw significant gains, with many months seeing increases over $2 relative to their opening price.

Jim Robb of the Livestock Marketing Information Center had a straightforward answer for the jump. “Those people just woke up. They were too low.”

Robb explained near-term futures had been at a surprising discount, and a lot of fundamental market analysts had been waiting for this type of rally. He said a big part of it was likely due to the high value of the boxed beef Choice cutout and the unusually large volume—over 70 loads—of Choice product that went out Thursday morning.

Thursday’s jump was in line with analysts’ earlier, more optimistic predictions.

The future behavior of the futures market is being watched with interest and caution by analysts. A number of external regulatory actions will be coming into play in the next weeks which could have an impact on the Chicago Mercantile Exchange (CME).

Troy Vetterkind of Vetterkind Cattle Brokerage cited elements of the Dodd/ Frank bill, which come into effect today, May 7, as having a potential negative impact on futures trading.

“A new law as part of the massive Dodd/Frank bill takes away [exchange member] exemption and anyone, whether a member or not, who does not have member status or hedge status will be charged full spec margins on the positions they are carrying. This means that either traders have to put up more capital, change the status of their trading accounts, or liquidate positions.”

Other upcoming changes to the CME—particularly CME’s proposal of a blended (electronic and pit) settlement of all ag futures—is likely to have disrupting effects on futures trading. The new proposal will purportedly distort the markets by giving undue advantage to High Frequency Trading firms and Algorithm trading systems which can process data and act many times faster than traditional pit traders. Vetterkind called this shortsighted and basically CME turning its back on the customers it depends upon.

As mentioned, cutout values were particularly strong last week. Choice cutout closed the previous week at $190.27 and Select at $186.05. By midday Thursday, cutout prices stood at $190.98 and $186.83, respectively, with a slight peak earlier in the week. Several analysts commented that the sustained high cutout values likely represent a topping out in the market.

“In all, it still feels like the recent run higher in boxed beef values may be slowing down and I think we can expect to see boxed beef values trend a little lower going into the first part of [this] week,” said Vetterkind.

“Product values are in the process of topping,” said Andrew Gottschalk of Hedgers Edge. “The only means to hold product values together is to reduce production.”

Packers may not go along with that. Since margins have rebounded nicely— estimates put them at making $22 a head as of Thursday—some anticipate they may try to ramp up processing to capture more of that profitable margin.

“Packer margins have finally moved back into the black, which will have them wanting to fund larger kills to take advantage,” said Vetterkind.

Consumer demand for beef is a concern for the near future. Several analysts called domestic beef demand soft. Gottschalk attributed the weak demand in part to the prevailing economic situation in the country.

“Economic uncertainty continues to weigh on consumers. The latest round of economic news did little to lift their spirits… Limited wage growth while job growth remains anemic is increasingly impacting consumers spending decisions.”

Despite this situation, Gottschalk voiced hope in seasonal consumer behavior.

“With first of the month sales, Mother’s Day, Derby, graduations, and the official kick-off of summer, the grills need to be glowing. Hope fully, the consumers will respond in the traditional manner and have some protein parties.”

Beef exports were up 9 percent—at 16,800 metric tons—from last week, but down 8 percent from the four-week average. Countries which saw import increases were Mexico, Japan, Egypt, South Korea and Canada. Egypt’s increased import of U.S. beef is likely due in part to the country’s recent bout of hoof and mouth running rampant through their herd.

Cut-specific values remained mostly steady for most cuts throughout the week with end meats and occasionally chuck and thin meats having some difficulty. Loins, ribs and ground kept steady or trended higher. Vetterkind commented that low retail demand for end meats will likely drag down on cutout values in the near future.

The week opened with an industry expectation of a 620,000-head production rate and stayed on track for that figure. Day-to-day slaughter numbers started the week below the previous week’s numbers, but then gained to overtake them later in the week. Last week’s numbers were consistently below last year’s numbers.

Both trim prices saw a fairly steady, though low gain throughout the first half of the week. While 90 percent trim continued this into Thursday—starting the week at 225.15 and closing Wednesday at 226.58—50 percent trim suffered an almost $4 drop Wednesday, falling to $85.61 from Tuesday’s close of $89.45.

This drop went unaddressed by analysts and seems out of place given tight supplies and high demand for ground products.

Feeder cattle

Last Monday, futures closed mostly 105 to 167 higher. “Feeders shot sharply higher thanks in part to spillover support from the live pit and ideas of light second-quarter placement activity,” according to John Harrington with DTN.

By Wednesday, there was some correction with futures closing mixed, up 5 to off 22. Feeders seemed to be torn between defensiveness in the live pit and breaking corn prices, Harrington said.

For the most part, feeder and stocker cattle traded steady to $3 lower with instances as much as $6 lower seen in some areas.

Feeder cattle auction numbers at some of the largest volume salebarns, including Oklahoma City and Joplin, were fairly heavy the previous week but nationwide receipts were still 16 percent lighter. So far for the year, receipts are running 4.8 percent lighter than last year and 7.8 percent lighter than the five-year average.

Many producers have been busy planting corn and making huge strides, whether they were making six-row or 36-row passes. No matter the pace, this year’s newcrop can’t help satisfy the current demand for corn on shrinking stockpiles.

On an estimated run of 9,800 head (up from 9,018 the previous week and 7,805 in 2011), Oklahoma City sold feeder steers and heifers $2-4 lower. The calf trade was not well tested.

In the Northwest Direct Feeder cattle area, feeder cattle for current and calves for fall delivery were steady to $2 lower. Trade was slow as the futures market was very volatile this week. Demand was light to moderate as most interests wait for next week’s video. The feeder supply included 71 percent steers and 29 percent heifers. Near 90 percent of the supply weighed over 600 pounds.

In Dodge City, KS, feeder steers were steady to $2 lower with feeder heifers steady. Uncertainty and sharp declines in the futures market early in the week left some sellers out of the market. Late week rebounding of the futures allowed for stability in price levels. Supply included 47 percent over 600 pounds and 44 percent heifers. — WLJ