Futures drop on concerns of soft demand

News
Jun 15, 2012

Last week’s cash fed cattle markets saw light demand and trade throughout the week, but with the majority of trade put off until Thursday and Friday. Trade in Kansas started with some takers at $118-119 live and in the Corn Belt, cattle were bought lightly at $190-193 dressed. Reports of $193 were mostly attributed to regional packers. For the most part, however, bids lagged behind asking prices in the north by $6-8 for the majority of the week.

Near term live cattle futures took an over $2 hit on Wednesday. Having opened the week at $119.90 for June and $120.95 for August, near term futures stayed roughly steady with slight downward trends within their respective dollar amounts. Wednesday opened at $119.30 and $120.23 respectively, then tumbled to $117.10 for June and $117.97 for August. The rest of the week saw futures try to regain ground lost on Wednesday, but as of Thursday midday, they made no headway, settling lower at $116.88 and $117.58, respectively.

Outside market concerns and worries over softening beef demand in the coming weeks spurred Wednesday’s sudden drop in both near term and deferred futures. The Dow yo-yoed last week as continued worries over the economic state of the Eurozone pressed markets. Spain’s debt was downgraded yet again and talk of bailouts faltered. The impacts of projected beef demand also caused a fallout in confidence, but that is addressed below.

Cutout values again have analysts saying prices are topping, despite growing over the past five weeks and generally maintaining high Choice values. That said, the Choice/Select spread has been growing as the Choice cutout value was slowly rising and Select was shedding a few cents each day. The week began with prior-week closing cutout values at $196.94 Choice and $182.65 Select. By Thursday morning, Choice had risen to $198.95 and Select had fallen to $182.41.

Given the high price of Choice, the anticipation of seasonal softness in retail beef demand, and the pressure on the value of most specific cuts throughout the carcass, Troy Vetterkind of Vetterkind Cattle Brokerage, Andrew Gottschalk of Hedgers Edge, and the analysts at DTN are calling for product values to start trending down in the coming weeks.

Packer income margins remained in the black last week, though not as spectacularly as in previous weeks. Over the course of the week, packers made an average of a little over $19 a head. The fact many packers were short bought still with orders to fill made for greater willingness to buy.

“The beef market is looking more and more toppy, however, as we mentioned [the prior] week, it could be a near term situation where packers simply need cattle to kill in order to cover forward sold beef orders,” said Vetterkind of the situation.

As mentioned, concerns over consumer demand are weighing on the market. Though there are hopes for some seasonal uptick in retail demand for the upcoming July 4th holiday, expectations are that demand will soften in the upcoming month.

Exports fell last week. At 15,700 metric tons, exports were down 13 percent from the prior week and 6 percent lower than the four-week average. Taiwan notably reduced its import of U.S. beef by 200 metric tons. Major export destinations— Japan, Mexico, Canada, South Korea and Vietnam— were consistent with recent weeks.

Most cut-specific values took a hit last week and will likely be a drag on cutout values in the near future if trends persist. Throughout the week, only Choice middle meats remained steady or traded higher, with all other cuts trading lower or sharply lower.

“There is some concern that at some point in time, middle meats are going to lose their seasonal luster, but it hasn’t happened yet and packers still report having short supplies of ribs and loins to sell in the spot market,” said Vetterkind.

The value of domestic cow beef for grinding was among those sharply down last week. Even though there is more domestic cow beef available due to an influx of cull dairy cows, imported boneless beef is still less expensive, pushing grinders to buy that instead. In the recent weeks when summer holidays drove up the demand for ground beef, grinders were more conscious of sourcing domestic product because of country of origin labeling. As consumer demand for ground has slacked, that is no longer a priority.

Last week, the industry corrected its prior week numbers to 652,000 head, up from its then-expectations of 645,000 head. Last week was gauged at a 650,000-head processing week. Throughout the week, beef loads sold as of Thursday were moderate at an average of 223.

Due largely to the drop in demand for domesticallysourced ground, trim prices fell throughout last week. Ninety percent trim started the week at $227.47 but fell to $225.70 by Thursday. The same trend was true of 50 percent trim, which started the week at $51.23 and fell to $47.92 on Thursday.

Feeder cattle

Feeder cattle did not escape the downward trend seen in their live fed cattle counterparts.

“Concerns that the beef market is going to move lower into the end of the month and ideas there are increasing supplies of fed cattle ahead of the market turned attitudes negative yesterday. Some of this negative sentiment filtered into the cash feeder cattle trade [Wednesday] with many sales calling their markets steady/$1-2 lower,” reported Vetterkind.

“Suffice it to say, though, that the cash feeder cattle market probably trades a little lower next week.”

Like the live cattle futures, feeder futures took a hit on Wednesday. August feeder futures closed Tuesday at $161.15 and fell $2.80 throughout Wednesday to close at $158.35. September feeder futures followed suit, dropping almost $2.75 to close Wednesday at $159.50. By midday Thursday, neither of the near-term feeder futures had reversed their downward trend, standing at $156.38 and $157.60, respectively.

Despite this downturn, however, activity is expected.

“Futures violated their recent uptrend which should encourage more selling on intraday rallies. Feeders are “overbought,” which should initiate some additional selling,” said Gottschalk on Thursday.

In the prior week in Wyoming, steers and heifers over 600 pounds (lbs) sold $2-5 higher than the week before. The market was untested for cattle under 600 lbs. Demand was good for the long strings of high quality but thin-flesh condition yearlings. Due to the continuing dry situation and lack of stock pond water, many producers are being forced to bring cattle to market, including yearlings and pairs. Feeder offerings were approximately 64 percent steers and 36 percent heifers, with 92 percent weighing over 600 lbs.

Amarillo, TX, saw limited receipts for feeders last week making a trend in the area hard to determine. Slaughter cows and bulls—making up 6 percent of the offering—traded $1-3 lower than the week before. About 73 percent of the offering weighed over 600 lbs.

Feeder steers and heifers traded mostly steady in Oklahoma, compared to the prior week. Demand for feeder cattle was described as moderate to good. Both steer and heifer calves traded $1-3 lower and calf demand was moderate to nonexistent depending on the days since weaning on individual animals. Animals over 600 lbs made up two thirds of the offering, with heifers accounting for 46 percent.

Of the situation of feeder calves around the country, Vetterkind had this to say.

“The calf market, on the other hand, was being called $2-4 lower as summer grazing demand slows down and drought in certain spots of the country is forcing cattle to market earlier than normal. This could start to have an impact on the yearling cattle as well, especially in parts of the intermountain west where dry conditions are becoming more of an issue and cattle are simply going to have to move off grass in the coming weeks.”

Kerry Halladay, WLJ Editor

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