Cold storage report chills futures

Markets
May 25, 2012
by WLJ

The cash cattle trade developed with moderate activity in the south Plains on Wednesday. Texas and Kansas saw roughly 30,000 head sell at $121 live. Analysts anticipate Wednesday saw most of the southern trade, though low volume suggested possible clean-up sales throughout the rest of the week.

The north Plains saw more sluggish live cattle trade with bidasking divides around $3-$4.

Wednesday did also see some live cash trade activity, but very light with just under 10,000 head selling at $193 dressed to mostly regional packers. By Thursday midday, little additional trade had developed in the north. In both the north and the south, cash trade was a steady $2 below the previous week’s prices.

After starting the week on carry-over enthusiasm from the prior week’s bullish cattle on feed report, live cattle futures have done nothing but drop. Nearterm futures started the week opening at $120.08 for June and $122.23 for August. By the end of the day Monday, both had lost roughly $1.50.

Minor intraday rallies ultimately lost ground to overall declines throughout the week. By midday Thursday, futures stood at $117.75 for June and $119.50 for August after a stair-stepped decline all week.

The drop in the futures market has been attributed to a number of things, among them Greece, the current position of the market, and the Tuesday-released US- DA cold storage report “Mounting concern regarding the fiscal health of Greece and the possibility they may leave the Euro has world financial markets in turmoil,” said Andrew Gottschalk of Hedgers Edge. “Even China has expressed concern as to the negative impact Greece could have on their exports to Europe.”

He went on to comment on the futures market condition, saying “[f]utures are in retreat from an ‘overbought’ technical condition.”

Troy Vetterkind of Vetterkind Cattle Brokerage similarly credited outside pressures and USDA’s cold storage report for the futures tumble.

“Live and feeder cattle futures settled sharply lower [Wednesday] on outside market pressures, which led to lower cash fed cattle markets, at which point it was a domino effect lower that kept pressure on the market going into the close. Larger cold storage stocks of beef and especially pork helped to weigh on the futures market as well [Wednesday].”

CME Group also reported the negative impact of the cold storage report on futures in no uncertain terms, calling the movement of meat and poultry in April “nothing to shout about.” More on the cold storage report later.

Cutout values saw a steady increase throughout the week, again eliciting analyst projections of topping out. Choice cutout started the week at $192.51 and Select at $186.56. By midday Thursday, Choice value had risen to $195.94 and Select, with a less dramatic increase, to $187.72.

“We believe product values have essentially topped,” commented Gottschalk. “Post Memorial Day fill-in business should provide some support [this] week before product values trend lower.”

Packer margins have remained in the black, though not as solidly as in past weeks. After starting the week making roughly $21 a head, margins dropped down into the mid-single digits between $4-8 a head for the rest of the week.

The USDA cold storage report had mostly bad news for beef and meat movement in general. Total frozen meat stores in all warehouses stood at 2.25 billion pounds as of April 30, up 5.9 percent compared to last year and up 7.5 percent from the previous month. CME analysts note that this store is the largest since August 2009.

For beef, in particular, the situation is similarly not encouraging. Frozen beef stocks stood at 517.53 million pounds, up 16.8 percent from last year and 2.9 percent above last month. CME pointed out the April 30 inventories of beef are the largest since November 2006, and is the sixth time that month-end inventories exceeded 500 million pounds.

“When we look at yearon-year changes, we have to be a bit concerned about beef, whose stocks have increased even though production has moved lower. If exports remained below 2011 levels in April, these mean beef movement was indeed slow.”

When it comes to exports, last week was in keeping with the prior week, which had been down significantly for its time. At 14,400 metric tons, exports were down 15 percent from the four-week average.

Retail demand has been down more than the seasonal norm, though up slightly from recent weeks. Gottschalk commented on the likely near future of retail demand.

“While a modest uptick in demand has occurred, demand remains below expected levels for this time period. Historically, June has become a better demand month than in prior years. Retailers have learned that they can carry sales momentum into the July 4th period. Then the summer slump occurs. How aggressively retailers maintain beef ads will determine the fate of June demand.”

Last week’s slaughter volume was first projected at 648,000 head, then reduced to a 640,000 head expectation. Day-to-day production rates vacillated between being steady with to below previous week numbers, and were consistently below last year’s numbers.

Cut-specific values held steady or higher throughout the week in almost all areas, with middle meats especially seeing some high value. Trim prices, both 90 percent and 50 percent, remained steady relative to their recent trends. Ninety percent trim spent most of the week hovering in the $229 area, then opened Thursday at $130.61. Relative to its recent rollercoastering volatility, 50 percent trim was quite calm, staying in the $52-$53 range, with a brief spike to $55.54 on Wednesday.

Feeder cattle

Compared to the previous week, light receipts of yearling feeder cattle sold steady to $3 higher while spotty offerings of calves traded unevenly steady. Reports from across the country noted that offerings were on the plainer side, yet prices still trended in a positive direction which could lend extra support for the market.

Salebarns north of Interstate-70 have almost completely gone to an abbreviated schedule of having maybe one or two sales per month. Farther south, the auctions are still held every week, but receipts are progressively becoming lighter and the number of cattle that would satisfy northern orders have become scarce.

For the year, nationwide feeder cattle auction receipts are running 5.6 percent lighter than 2011 and 9.2 percent lighter than the five-year average. As offerings shrink, the demand for yearling feeders has started to percolate, with most market watchers expecting prices to overflow just as temperatures get the hottest (July and August).

In Valentine, NE, a lone load of 8 weight steers forecasted this summer’s fortune by averaging 806 pounds at $162.25. The day after, cattle producers ran through the streets screaming Extra! Extra! with their hot-off-the-press copy of this month’s cattleon-feed report. Finally, after 23 straight months of year-over-year increases, the on-feed inventory was less than the previous year.

In Amarillo, TX, feeder steers and heifers sold mostly steady to firm on comparable sales. Warm weather and recent rains throughout the area has buyers optimistic, looking at less need for supplemental feeding. Slaughter cows sold $1-2 higher and bulls traded steady.

In Wyoming, feeder steers and heifers sold steady to $4 higher. Continuing dry conditions and lack of stock pond water has forced many producers to bring cattle to town, including yearlings and pairs.

In Washington, compared to the previous week, stocker and feeder cattle were steady to firm in a light test. Slaughter cows were steady. Slaughter bulls were $5-6 higher in a light test. — WLJ

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