Futures rally on Japanese hopes

Jul 20, 2012
by WLJ

Cash live cattle trade surfaced unusually early last week, with most activity on Tuesday and some cleanup trade on Wednesday. Early trade on Tuesday went for $111-113 live in the south and $112-113 live, $178-180 dressed in the north. Later-day Tuesday and cleanup trades generally went for $1 lower than earlier numbers. Extremes of $181 dressed (in Kansas for 72 head) and $110 live (Iowa) were noted but not the trend.

The live cattle futures got an injection of excitement from a number of sources, seeing almost limit up jumps on Wednesday. After starting the week at $117.20 for August and $121.45 for October, the futures trended downwards through Tuesday, closing at $115.47 and $119.97, respectively.

Word that Japan is seriously considering easing their age restrictions on beef animals, coupled with an exuberant jump in outside markets and the idea that summer lows may have been realized, sent Wednesday’s futures up to the limits. August and October futures closed Wednesday with over $2.50 gains in each, at $118.07 and $122.82, respectively.

Much of these gains were retained into Thursday when, by midday, August live cattle futures were trading for $119.08 and $124.28 for October. Deferred futures were also gaining through Thursday’s early trade.

Corn continued to hog the market spotlight throughout the week as ongoing projections of diminishing yield and overall production play center stage in many minds. Corn futures have been jumping up considerably on concerns of lacking availability in the months to come. Andrew Gottschalk of Hedgers Edge reviewed some historical data regarding corn yields in times of drought.

“An analysis of yield data beginning in 1974 breaks down into three distinctive patterns: normal production trend, problem year trends and disaster years. The latter was comprised of the years 1974/75, 1983/84, 1988/89 and the most recent year of 1993/94.

“Re-trending the best of the disaster years would imply a final corn yield of 130 bpa [bushels per acre]. Re-trending the worst of the problem years would imply a yield of 139.5 bpa. It would appear the best case scenario would produce a yield no better than 140 bpa.”

The spread between Choice and Select cutout values narrowed last week as Choice lost ground yet Select remained steady. The cutouts started the week at $184.15 and $172.12, respectively, and by midday Thursday had gone to $181.03 and $171.97. Select remained in the $172 area while Choice couldn’t seem to hold gains.

Packers were again flirting with red ink last week. Monday saw their estimated per-head returns at a loss of about $6, but they recovered a modest profit margin of the same which they held onto for the rest of the week.

Export demand for U.S. beef declined last week as the dollar has gained strength over the other currencies. Net exports stood at 15,600 metric tons of beef, a 10 percent decline over the prior week’s exports and down 12 percent from the four-week average. Increases in exports were seen for Canada, Mexico, Vietnam, Japan and Egypt.

Retail demand for beef continues in its seasonal slump with significant discounting seen in many areas across the carcass. Middle meats, particularly loins, ribs, and a variety of steak cuts, traded at sharply lower prices as consumer demand remains below seasonal norms. This is largely credited to the heat, but also general economic uncertainty.

End meats traded mostly steady last week with a high on Tuesday. Ground formulations were mostly weak and saw some discounting, but boneless beef was mixed, sometimes weak and other times steady to higher.

Last week was pegged as a 640,000 slaughter week and processing went according to the estimate. Day-to-day processing rates were mostly steady to lower with the prior week’s rates, and mixed when compared to the same date last year.

Ninety percent trim prices declined over last week. At the beginning of the week, 90 percent stood at $218.99 then proceeded to drop the rest of the week. By Thursday morning, 90 percent trim had fallen to $215.33. Fifty percent trim started the week at $46.68, climbed to a high of $48.32 on Tuesday, and was down to $47.93 by Thursday.

Feeder cattle

Cash trade in feeders took a beating from corn last week. Despite expectations of tightening feeder supplies, feed costs are occupying most people’s attention. As of Thursday morning, a 750-pound steer was trading for a median of $133.55 in the El Reno, OK, auction, and at $137.13 in Dodge City, KS.

Most markets for feeders called their trade lower to sharply lower last week. In Amarillo, TX, there were not enough comparable sales for an adequate market trend, but a much lower undertone was noted on all classes of cattle. A couple loads of yearling steers weighing 750-900 lbs were available in the offering and sold for roughly $131.50.

In Oklahoma City’s National Stockyards, feeder steers and steer calves traded $6-8 lower than the prior week. Feeder heifers and heifer calves were $6-10 lower. Break evens are becoming increasingly hard to figure as prices move sharply on a day-today basis. Weather and pasture conditions across more than half the country have investors nervous about the outlook of the country’s grains.

Feeder steers under 950 pounds were trading steeply lower at $10-20 below most recent prices in Sioux City, SD. Heavier feeder steers were not so hard-hit, selling at only $3-5 lower. Demand was more moderate this week after the steep selloffs following the skyrocketing of corn prices due to the ongoing drought in the Corn Belt.

Gottschalk opined that “[f]eeders will move inverse to the temperature. Despite tight feeder supplies, feed prices and forage supplies trump limited feeder and calf supplies excreting pressure on feeder prices.”

Troy Vetterkind of Vetterkind Cattle Brokerage said it was likely some stability in the cash fed cattle markets would curtail the deep slide in feeder cattle prices. As cash fed cattle did, at least briefly, firm up at the end of last week, cash feeder prices will have to be watched closely.

Near term feeder futures were all over the map last week. Opening Monday at $136.63 for August and $139.60 for September, feeder futures proceeded to plummet the full $3 limit as corn futures shot up near full limit. Tuesday saw choppy but low trading all day as concerns over in-the-red feeding margins and lack of buyer interest made corn’s activity particularly painful.

However, Wednesday saw near term feeder futures regain their Monday losses and then some. Despite some faltering early Thursday morning, midday saw August futures trading at $138.85 and September at $141.45. Much of this rally in feeder futures was attributed to spillover buying from the live pit and isn’t seen as a trend-changing move.

“Drought conditions continue to shorten the grazing period, and cattle with retained ownership are moving into the feed yards. Corn prices and crop deterioration continue to trump all other items for feeder cattle prices… Hot and dry conditions should continue to exert selling pressure on the feeder complex. Although futures are ‘oversold,’ rallies are expected to be short lived at this time,” said Gottschalk.

Vetterkind had a similar view of the feeder futures’ rally, calling it a “dead cat bounce” in reference to the market axiom that anything—including a dead cat—will momentarily bounce back after falling from a sufficiently high position. — WLJ