Futures rally on cattle on feed predictions

Markets
May 18, 2012
by WLJ

Again, the cash fed cattle markets remained immobile until Friday. Bids trailed asking prices by $3-$5 in most cases and up to $9 in more extreme cases. Asking prices stayed steady for live cattle at $122-123 in the south Plains and ranged from $194-197 dressed in the north. Bids, mostly in southern regions, stayed at $117-119 live and $188-190 dressed. By midday Thursday, no trades had been reported.

“Higher settlements in front month live cattle futures as well as more talk of two of the major packers being short bought on cattle and need cattle to kill to fill beef orders keeps feedlots holding strong with their higher offering prices,” commented Troy Vetterkind of Vetterkind Cattle Brokerage regarding the intractability of feedlots.

“The boxed beef market took a step backwards [Wednesday] and this could be the case for the balance of the week, but I don’t think that is going to matter as I think packers need to have a larger kill this week to cover Memorial Day beef orders.”

Live cattle futures, both near-term and deferred, enjoyed a steady increase throughout last week. Opening the week at $115.15 for June and $117.63 for August, near-term futures climbed to $117.75 and $119.63, respectively by midday Thursday. A price of $117.85 is said to be the resistance point for June futures.

Much of the climb in nearterm futures has been credited to Memorial Day demand and expectations of packers continuing in their shortbought status. Growth in deferred futures was attributed to the projected results of USDA’s cattle on feed report which will be reported in WLJ next week. Andrew Gottschalk of Hedgers Edge reports the industry average estimates place cattle on feed numbers for May 1 at 100.3 percent, April placements at 88.4 percent, and April marketings at 98.6 percent.

“Deferred futures are benefitting from the expectations that Friday’s cattle on feed report will show a sharp decline in April placements. This will likely prove to be a ‘buy the rumor; sell the fact’ situation with the sharp rebound in May placements,” commented Gottschalk last Thursday.

Cutout values grew slightly over last week, dipping somewhat on Wednesday. The Choice cutout started the week at $189.10, rose to a week high of $191.61 at Tuesday’s close, then dipped down to $190.98 at Wednesday’s close. By Thursday midday, Choice had regained some ground at $191.22, but it was unclear if it would return to earlier highs.

The Select cutout had a similar week chart trend. Select started the week at $183.05, peaked at Tuesday’s close at $187.08, then dropped to $185.10 at Wednesday’s close. Thursday saw it gain more ground than Choice with a midday value of $186.12, but its future was similarly uncertain.

As quoted earlier, Vetterkind did not see Wednesday’s cutout dip as overly concerning. Gottschalk also commented that the move was expected given fill-in business conducted earlier in the week.

Packer margins remained mostly in the black last week though less robustly than in previous weeks. Compared to the prior week where packer margins stood at about $20 a head, last week’s margins hovered within the positive teens, with Monday seeing a bit of red.

Retail demand for beef appears to be up in the face of upcoming grilling-heavily holidays. All cuts saw steady to higher trade with the exception of imported boneless beef products as there is too much on hand at the moment. Domestic grinders are sourcing chuck and round cuts for premium ground products in advance of Memorial Day, driving up trade for these cuts.

Exports, at 14,400 metric tons, dropped last week by 31 percent compared to the previous week and 22 percent from the four-week average.

Industry estimates at the beginning of last week placed slaughter volume at 640,000 head. Throughout the week, day-to-day processing numbers trended above prior-week numbers, but below last year’s numbers.

Trim prices were again mixed in their behavior. Ninety percent trim had a slightly downward trend last week. Prices for 90 percent trim started the week at $228.93 and slid to $227.65 by Thursday morning. The volatility of 50 percent trim of prior weeks continued last week. Fifty percent trim started last week at $65.94, jumped up over $7.50 by the next day, remained relatively steady the following day, then plummeted nearly $20 to open Thursday at $52.84.

Vetterkind explained that this rollercoastering price is likely a ripple-effect of the earlier lean, finely textured beef (LFTB) fallout of April.

“Back in March, when 50 percent fat trim was in free fall due to the LFTB furor, a lot of 50s were bought and put in cold storage, and now that product is coming out of cold storage and being offered to the market. This means that fresh product has to compete with frozen material and lower pricing is noted.”

Feeder

Cattle feeders continue to experience negative feeding margins due to higher costs of feeder cattle and feed. This fact, coupled with the expected results of USDA’s cattle on feed report and rumor of short-bought packers, has made feeders dig in their heels on live fed prices. Some relief may be coming to feeders in the form of feed prices, but this may be mitigated by other forces.

Feed grain prices are expected to moderate slightly through the spring and summer of 2012, but feeder cattle and soybean meal prices are expected to increase during the same period.

Without a significant improvement in fed cattle prices and lower feed and/or feeder cattle prices, feeding margins will not improve, according to USDA reports.

The situation does not appear likely to improve until later in 2012 or early 2013 when new-crop corn prices decline. Weaker corn prices are likely to be accompanied by relatively high protein-meal prices because of an apparent shift from soybean acreage to corn acreage, leading to the expectation of higher supplies of new-crop corn and associated price declines. Another factor offsetting lower new-crop corn prices is anticipated increases in feeder cattle prices over the remainder of 2012 and throughout 2013 in response to the tightest feeder cattle supplies in decades.

Cattle producers and backgrounders are hoping the early summer lull in supplies will spark the CME Feeder Cattle board and out-front demand for feeding cattle as a large percentage of the late summer and fall delivery feeders will be priced during June private treaty and/or video sales.

Any input cost relief for the cattle feeder would also strengthen the already stout market for feedlot replacements. Any trade activity that hinted that the demand for yearlings could far outweigh the supply was put to rest with the unprecedented size of this year’s corn crop, eliminating some fears of limited stockpiles and sending prices tumbling. USDA’s Supply and Demand report forecasted this year’s corn crop to be fully 20 percent larger than last year, with 5.1 million more acres planted (a 6.1 percent increase) and nearly a 20 bu/acre increase in expected yield (12.8 percent more than 2011). Besides plowing up pastures and fencerows, many farmers decided to go corn-to-corn in their favorite fields rather than alternating crops.

In South Dakota, feeder steers under 600 pounds sold $7 to $8 lower, 600 to 750 pounds sold $2 to $4 lower, and over 750 pounds were steady to $3 higher. Feeder heifers were mostly $1 to $3 higher.

In Oklahoma City, feeder steers and heifers sold steady to $2 higher. Steer and heifer calves were not well tested. Weigh-ups showed the complete range of gaunt to full and supply included 82 percent over 600 pounds with 35 percent heifers. — WLJ

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