Futures oppose cutout, confuse the marketplace

Jun 1, 2012
by WLJ

Last week’s markets saw a “dysfunctional” and almost schizophrenic divide between strong cutout values and dropping live cattle futures. The resulting confusion made for spotty trade and reluctant buyers and sellers wary of committal.

Light and sporadic trading occurred in the cash fed cattle markets by midday Thursday, none of it sufficient to establish a trend. Asking prices of $122-123 live and $195-196 dressed were unmet by bids at the beginning of the short week. When bids did develop, they trailed asking prices by roughly $5 in both areas.

Some very light trade developed in Iowa at $189- 190 dressed and a few regional packers trading at $191, but this wasn’t enough to call it a trend. Analysts expected fill-in business following good weekend beef clearance and anticipated retail demand coming into June to push activity to Friday.

Outside market influences stole the stage in the live futures markets last week. Though not conclusively linked, word of Spain’s debt being further downgraded into BB- junk status lined up well with near-term live cattle futures losing $1.22 (June) and $1.48 (August) from open to close on Wednesday.

Other outside market issues contributing to the uncertain market included continued concerns over Greece leaving the Euro zone, financial concerns in Italy, and worrisome spending behavior in China. Calendar-related behavior also was an issue, according to Troy Vetterkind of Vetterkind Cattle Brokerage.

“Cattle futures succumb to sell pressure in the outside markets and end of the month liquidation selling. In the process, June and August made bad technical trades closing below $117 and $119, respectively.”

Despite the Wednesday drop, near term futures tried to regain lost ground on Thursday, rallying to $117.40 for June and $118.88 for August by midday, up from an open of $116.48 and $118.00, respectively. This bounce-back brought near term futures close to regaining their week-opening levels of $117.65 for June and $119.10 for August.

As mentioned, cutout prices did nothing but climb last week in defiance of shaky futures behavior and analysts continued expectations of “topping out.” At the close of the previous week, Choice cutout value stood at $194.63 and Select at $185.46. Both proceeded to gain roughly $2-3 by midday Thursday to $197.77 and $187.59, respectively.

“Product values have advanced as expected from good fill-in type business,” said Andrew Gottschalk of Hedgers Edge. “We expect this pricing is nearly finished with lower beef prices expected next week.”

Manageable packer inventories and the expectation of continued retail demand in the coming weeks have also been credited with the strong boxed beef values. On that note, all cuts traded steady to higher with the minimal exception of ground formulations being soft at the beginning of the week.

“One has to assume that we are getting very near a seasonal spring top in middle meat values, but it may not top out for another week or so after packers return to killing enough cattle to cover near term business and start to build a little inventory,” said Vetterkind.

The issue of production rates is also something of note. Last week’s shortened week has the potential to cause packers difficulty in upcoming weeks.

“Contacts tell me packers are swamped with beef orders, both domestic and international, and they are simply short of inventory to fill those orders,” Vetterkind reported. “[Last] week’s shortened holiday kill week isn’t going to help. It could take a couple of weeks of 640,000-plus kills to get business satisfied and get enough inventory around them before the beef market starts to get soft again.”

Industry expectations placed last week as a 570,000-head production week. With the Monday holiday, most numbers were lower than prior year but day-by-day comparisons with the prior week were up. By Wednesday evening, 263,000 head had been reported processed, leaving large processing days for the rest of the week.

So far, this year’s year-todate beef production is down 3 percent from last year. This is in the face of year-todate slaughter being down 4.8 percent. CME Group explained that the discrepancy stems from the noteworthy gains in carcass weights in slaughter steers and heifers.

Reportedly, average steer carcass weights are up 24 pounds and average heifer carcass weights are up 30 pounds as compared to 2011 levels. Without this gain in average carcass weights, CME says the year-to-date beef production would be down 5.2 percent rather than just 3 percent.

CME credits delayed marketings due to poor packer margins earlier in the year and the industry’s recent embrace of beta-agonists in late-phase feeding. This latter element is said to lay down 15 to 30 pounds of additional muscle when used in the last weeks before processing.

Trim value behavior remained in keeping with the prior week. Ninety percent trim stayed fairly stable with a slight gain throughout the week, going from $230.31 at the week open to $231.25 by market open Thursday morning. Volatility in 50 percent trim was once again relatively subdued with values bouncing around the lower half of the $50 range.

Feeder cattle

Compared to the previous week, offerings of calves and yearling feeder cattle sold steady to $3 higher, with several auctions reporting calves and yearlings selling $5-6 higher. In the south, feeder cattle traded mostly steady to $2 higher.

Demand remains good for feeders, with the best money on yearlings, although the board, overall, failed to respond to the bullish Cattle on Feed Report.

Direct feeder cattle trade in Texas and Kansas was $2-5 higher. In Bassett, NE, 174 head of steers weighing 930 pounds sold for $144.25, and 184 head of steers with a weighted average of 857 pounds sold with weighted average price of $151.67.

Despite good demand, August feeder cattle are now the spot month and under pressure, according to some analysts. Losses at the feed yard level are discouraging some from purchasing the high feeder cattle.

As we go through the summer months, we would expect lower numbers and replacements to continue. The USDA Livestock & Grain Market News office in Dodge City, KS, noted that temperatures reached 100 degrees the previous week with very windy and dry conditions. If the dry conditions continue over the next couple of weeks, Kansas will see cattle moving early off grass to the auctions.

The western two-thirds of Texas remain dry but are not in nearly as bad of shape as they were last year, with most of Oklahoma now out of drought conditions with improvement continuing through the region as wheat harvest is starting.

Other areas, such as eastern Wyoming and western Nebraska, are dry as well as the southeast. Through the Midwest, corn planting is virtually finished with 96 percent reported planted, a record level for this time of the year. This is compared to 79 percent last year and a five-year average of 81 percent.

The early planting and excellent early reported conditions had the corn market last week sharply lower. Outside markets last week also pressured the corn market and crude oil closed below $90 a barrel for the first time since October.

In Oklahoma, feeder steers were $2-4 higher. Feeder heifers were $1-4 higher. Steer calves and stockers were $2-4 higher compared to a very light test the previous week. Heifer calves and stockers were $2-4 higher. Supply consisted of 83 percent over 600 pounds and 51 percent heifers.

In Kearney, NE, at one of the first reported sales in several weeks, a large crowd of buyers showed up to bid readily on calves and feeders. A heavy supply of slaughter cows and bulls sold in the mix. The supply included 75 percent feeders, balance on slaughter cows and bulls. Of the feeders, 33 percent were steers and almost 65 percent heifers with the balance on bull calves with 83 percent weighing over 600 pounds.

“Granted it’s dry in southern Montana, eastern Wyoming, and northern Colorado and we are seeing increased numbers of cattle moving out of that part of the country. In fact, there is talk that May placements could be 5 percent above last year, but the rest of the country doesn’t seem to be in that bad of shape and available feeder cattle numbers still remain tight,” Vetterkind said. — WLJ