Cutout values continue to fall

Jul 13, 2012
by WLJ

Cash fed cattle buying was spotty throughout the week with packers and feeders mostly at a stalemate. Few sales too small to establish market trends took place early in the week—a few hundred head sold in Iowa at weighted average of $186 dressed on Tuesday and a few more at $184 dressed on Wednesday—with the bulk of trading put off until Friday.

Live asking prices stood at $119- 120 most of the week in the South Plains, but began to relent Thursday, dropping to $117-118. Only confirmed bids in the area as of Thursday were $113-114. The Corn Belt saw no bids aside from the aforementioned small trades with dressed asking prices ranging from $185-188 to $190 and over depending upon region.

Near-term live cattle futures had a progressive decline all last week. August futures opened the week on Monday at $119.15 and slid down to $117.23 by midday Thursday without much interruption. October live futures similarly shed about $2 throughout the week, going from $123.43 to $121.58 by midday Thursday.

Analysts credited the decline in futures to a number of factors. Corn markets, declining beef demand and product values, uncertainty in the domestic and global markets, and lower than expected second quarter profit reports all played a role. Additionally, the spectacular loss of $200 million via misused customer funds at Iowabased futures broker PFGBest and the highly publicized attempted suicide of its founder likely shook confidence in futures to the tune of MFGlobal’s collapse.

Cutout values continued their decline from the previous week. From the close of the prior week to midday Thursday of last week, Choice cutout lost nearly $6, going from $192.65 to $186.74. Select declined as well, but held value better than Choice, moving from $174.71 to $173.81 in the same time frame.

Packer indexes have also begun to slide as product values dip and demand is predicted to soften more than is usual for the season. Estimated packer profits began the week at about $46 a head and fell to just over $10 by Thursday. This will likely drive bids lower in the coming weeks as packers try to remain in the black. Cattle feeders, still operating at large per head losses with the prospect of higher feed costs due to the corn situation, are expected to resist lower bids.

The cutout value has in part been dragged down by significantly reduced domestic demand across almost all carcass areas and discounting of many cuts was seen throughout last week. Middle meats and particularly loins and ribs traded lower to sharply lower as seasonal softening in demand combines with consumers rejecting the high retail prices. Troy Vetterkind of Vetterkind Cattle Brokerage predicted it will take some significant discounting to woo consumers back to these cuts.

“We are going to need to get these middle meats down to a price level where domestic buyers feel it’s worth stepping back into the market to take on some inventory, but that could take several dollars per cwt. on the individual subprimals within the rib and loin complex or an additional $6-7 lower in the Choice cutout and $3-4 in the Select cutout.”

Ground formulations saw some mixed trade but with expectations of post- July 4 holiday demand softness to continue until procurement interest picks up ahead of Labor Day. Boneless beef traded lower as supplies exceeded demand.

End meats have been called the one bright spot in the cut-specific values with export interest holding the values of end cuts steady to higher. Exports stood at 17,300 metric tons, down 13 percent from the prior week, but up 1 percent from the four-week average. Japan, Vietnam, Mexico, South Korea and Canada all increased their imports from the prior week.

Last week’s industry estimate was for a 640,000-head production week. Day-to-day slaughter rates were mixed, though generally up as compared to the prior week’s production rate due to the holiday. Forecasts for this and coming weeks suggest lower weekly production rates.

Trim prices fell slightly with softening demand for ground formulations and boneless beef was discounted and abundant. Ninety percent trim lost almost $2 across the week, going from $220.72 on the prior week’s close to $218.93 Thursday morning. Fifty percent trim did not move much when examined on the week open/week close perspective—starting the week at $48.47 and Thursday morning seeing it at $48.83—but lost the week high of $51.75 it gained Tuesday.

Feeder cattle

Feeder prices continue to soften with drought conditions across the U.S. sending corn prices skyrocketing. Feedlots are cautious considering current losses and future feed costs. A 750-pound feeder steer was selling for $142.

“The cash feeder cattle market carries a softer undertone keeping pace with losses earlier in the week. El Reno, OK, had 9,252 head on offer [Wednesday] with that market being called $2-6 lower. The bulk of the 750-800 pound feeder steers in El Reno [Wednesday] were bringing from $135-145. Obviously the concern over this year’s corn crop and the lower production estimates from USDA keeps pressure on the cash feeder cattle market,” Vetterkind said.

The last thing cattle feeders needed was a $2 a bushel increase in corn prices. Already suffering from losses in excess of $200/head, feed costs are the biggest concern on profitability.

Feedlots are purchasing corn at $15/cwt. for current delivery. This translates into cost of gains of $130. The calves purchased for summer grazing at $2 and higher will not be profitable at current feeder prices, according to analysts.

Cattle markets are more vulnerable to short run price impacts due to drought this year compared to last year, according to Derrell Peel with Oklahoma State University. “Because the drought region was so focused last year and conditions were so drastically different (better) in other regions, the enormous marketings of feeder cattle and cows last year has less impact than typical for a drought of that magnitude. Last year, the ability to relocate cattle to regions of good forage or into feedlots, combined with an overall strong cattle market situation, kept market price impacts for feeder cattle and cows to a minimum,” he said.

This year’s widespread drought changes the overall picture, Peel said.

“A few people selling some animals over a wide area is likely to have more market impact than many people selling lots of animals in one region when good conditions exist outside that region. For producers who determine now that some feeder cattle or cows will need to be sold before fall, the danger of waiting is higher over the next couple of months. This is especially risky since the drought is not only impacting pasture and hay production but is also impacting feeder markets through sharply higher corn prices,” he said.

Similar to last year, the drought is changing the timing of feeder cattle sales and early sales of calves and feeder cattle mean that feeder supplies will be even tighter later, Peel said. But on a positive note, Peel added, “Depending on how the drought develops this summer, calf markets could rebound significantly this fall.” — WLJ