Cutout values dip; futures uncertain

May 11, 2012
by WLJ

Cash fed cattle trades were at a standstill throughout most of the week with neither side giving ground on prices through midday Thursday. The schism between bids and asking prices stayed solid at $5-7 with bids of $117 live and $190 dressed in the face of $122- $123 live and $195-$197 dressed asking prices in the Southern Plains.

In the Northern Plains, asking prices were $124 live and $196 dressed. Bids were similarly low in the $117 area for the most part. The only exception was a pittance 400 head sold in Iowa for $120 live and $194-$195 dressed. Kansas similarly saw small trade on Wednesday with 300 head sold at $193 dressed.

Analysts cited feeders’ unwillingness to back down on asking prices, given their abysmal per-head losses of late, and the hope of better economic news as cause for this stalemate. Activity was expected to pick up late Thursday or Friday, however, due to the need to have cattle to kill for upcoming holiday retail demand.

By midday Thursday, bids came more in line with asking prices in the North at $190-$193 dressed, though feeders were still holding out with their asking prices.

Near-term futures saw a gradual overall climb last week despite some intra-day volatility. The week opened Monday with June futures at $115.85 and August at $118.55. By midday Thursday June sat at $116.25 and August at $118.60.

Intra-day lows saw prices approaching the June basis. Troy Vetterkind of Vetterkind Cattle Brokerage is hopeful this—plus black packer margins to the tune of a steady $20 a head—may see more packer activity.

“With the last two day’s intra-day lows in June live cattle at $115, which would represent a $184 dressed price, packers haven’t been able to buy cattle that cheap since last August so why wouldn’t they be there to support the market?”

Concerns over external market forces—such as political and economic instability in Europe, China’s corn and soybean demand, and general uncertainty at home about weak job performance—have been counteracted by strength in feeder markets and feeder futures. The balancing act of these two elements, which could individually have caused downward or upward movement in fed cattle futures, is being credited with keeping them on a fairly even keel.

Despite earlier analysts’ predictions, cutout values held steady and even gained slightly most of the week. The prior week market close saw Choice at $190.29 and Select at $186.11. Monday of last week saw Choice open $0.29 higher and Select drop $1.48 but both progressed at a shallow gain, peaking at market close Wednesday at $191.51 and $185.95, respectively.

Midday Thursday however saw both Choice and Select lose about $1.50. It is possible this is the price downturn analysts have been expecting following what has widely been called the topping out of cutout values a few weeks ago.

“So far this year, we seem to have shut beef demand off at a choice cutout priced at $200, however we seem to attract beef business both domestic and export at in the mid-lower $170s basis the choice cutout. I believe this will continue for the balance of 2012 and likely 2013,” said Vetterkind.

Andrew Gottschalk of Hedgers Edge commented on the consumer demand situation.

“The trade [Wednesday] was excited about ‘improving demand.’ It had better be improving, given that this time of year is the best of the year. Mother’s Day business is covered; the grilling kickoff of Memorial Day weekend and then Father’s Day grilling is still ahead. 2 weeks from now most of that business will be booked.”

Despite these hopes for consumer behavior surrounding these mainstay holidays of the grilling season, Gottschalk described May’s performance thus far as “sputtering out of the gate.” Poultry has been gaining ground on consumer protein purchases to the detriment of beef and pork.

Exports were up notably, 24 percent above from the previous week and 9 percent above the four-week average. Export destinations which increased their intake were Japan, Canada, Mexico, Vietnam and Egypt. Export demands played a role in higher cash fed prices in the previous week, so it is likely the same will be true of last week.

Most cuts held their value steady with the prior week with many cuts such as loins, ribs, chucks and rounds selling higher. Ground formulations saw steady/higher value due to increased demand. The only cuts which saw some discounting in the week were imported products and boneless beef items which were in abundance.

“I believe we have seen a burst of export business develop in the last couple of weeks as evidenced by weekly export sales and comprehensive beef reports and this has left packer inventories of beef to sell very manageable in the near term, which allows them to offer beef into the domestic market at higher price levels,” said Vetterkind of the strong prices.

The industry anticipated a 625,000-628,000-head processing week and held well with those expectations through midday Thursday. The week’s day-to-day slaughter rate began higher than the prior week, then leveled off to steady, then dipped below the numbers of the prior week. All numbers were below last year’s sameweek numbers.

Ninety percent lean trim had a good week with mostly steady with some growth, starting last week at $226.50 and reaching $227.51 by Thursday morning. Increased demand for lean ground formulations for grilling can be credited with its strength.

However, 50 percent trim struggled, losing almost $10 at the end of the previous week and then falling almost $8 after rallying to $82.85 in the beginning of last week. By Thursday morning, 50 percent trim sat at $74.90.

These manic price jumps came as Beef Products Inc.— primary maker of the unjustly defamed lean fine textured beef—announced that it will permanently close the three plants it had put on hiatus following the media scandal.

Vetterkind pointed out that 50 percent trim can represent about 10 percent of a carcass’ value. As such, he expects one of the major packers to try to purchase these plants or somehow get them back into production.

Feeder cattle

Feeder cattle receipts at the Hub City Livestock Auction, Aberdeen, SD totaled 2818 head on Thursday. Feeder steers sold mostly $2 to $4 higher, with instances of $9 to $10 higher. Feeder heifers were mostly steady to $2 higher. There were several load lots offered. The overall quality was very good, especially the steers. It was an active market with good demand. 283 feeder steers, medium and large 1weighing 834 pounds (lbs.) averaged 148.29 per hundredweight. 255 heifers weighing 917 lbs. brought 129.53 at Aberdeen.

In Amarillo, feeder trade was moderate. Approximately 71 percent of feeder animals traded weighed over 600 lbs. with good offerings in the 600-800 lbs. range. At the Oklahoma National Stockyards, demand was good for all feeder classes. Demand was very good for new crop calves as some folks still looking for cattle to turn out on grass.

Gottschalk spoke of the tight supplies of feeders going into summer.

“Generally, the shorter the supply condition the earlier the low is made and the later the high is made. That price pattern is likely this year. The long term supply/ demand outlook remains favorable for feeders and calves. We are estimating April feedlot placements down 14.5 percent. We see little to alter this trend through June.”

At mid-week, futures closed mixed, up 30 to off 72. Spot May was dragged substantially lower by the discount of the cash index and winter grain fields cleaning up. The cash index is several dollars under the futures on May feeder cattle.

In the past two weeks the August contract has gained almost $10.

USDA released a corn stocks and crop report exceeding trade estimates. The estimates were for ending stocks of 750 million bushels and the release number was 850 million bushels.

According to analysts, the combination of lower corn prices and weaker live cattle futures has the overall direction in the feeder cattle complex up in the air and a major question for both commercial and investment traders. — WLJ