High cutouts could slow demand

Markets
Aug 17, 2012
by WLJ

Cash fed cattle markets were slow to develop last week with minimal activity occurring through Thursday morning. Not enough trade occurred in the first half of the week to establish an accurate market test. Expectations existed of serious trade developing on later Thursday and Friday at $1-2 above the prior week’s levels.

During the first half of the week, bids of $118 live trailed asking prices by $4-5 in the Southern Plains with bids mostly absent in the Corn Belt where asking prices were $193-195 dressed. Rumors existed of at least one major packer being short bought ahead of the upcoming Labor Day holiday. Analysts expect trade this week will be steady to lower with last week’s trend.

Near term fed cattle futures made some awesome intraweek gains but could not hold onto the week’s highs by midday Thursday. After opening last week at $121.35 for August and $126 for October, near term futures saw highs of $122.50 and $127.08, respectively, on Wednesday morning. By Thursday afternoon, however, August had held onto only 38 cents over its Monday open to stand at $121.73 and October futures lost 47 cents, compared to its week-open, to stand at $125.53.

Over the course of last week, cutout values gained significantly, but the spread remained steady with the close of the prior week. By Thursday morning, the Choice cutout value had gained $6.01 over the course of the week to stand at $190.96. In an entertaining coincidence, the Select cutout value also gained $6.01 to stand at $183.66. The entertaining coincidences continued in the spread which was $7.30 as of Thursday morning, the same as the close of the prior week. The overall average spread across the week was $7.54.

The movement of cutout values throughout last week—which reached a high of $191.10 Wednesday morning for Choice—continued to challenge the Choice resistance level of $190. Values which are too high could threaten retail and consumer demand for the upcoming holiday.

“The advance [in product values] will limit retail beef features this fall as retailers have increased pork production to feature,” said Andrew Gottschalk of Hedgers Edge.

So far, however, retail demand for beef seems strong.

Demand for middle meats and ground in particular have led cutouts higher ahead of the last summer holiday. “In all,” said Troy Vetterkind of Vetterkind Cattle Brokerage, “packers report having manageable inventories of beef to sell near term and demand is enough to clear current production. This should continue to support beef cutouts near term.”

Export sales were up sharply last week at 20,900 metric tons. This is 13 percent above the prior week and 30 percent above the four-week average. Increased exports were reported for Japan, Vietnam, Russia, Mexico and Hong Kong.

The increased export demand has also played a large hand in driving cutout values up and could likely help hold them at that level in the near future.

The tightening supplies of slaughter cows and imported boneless beef are adding additional support to trim prices. From the close of the prior week to Thursday, 90 percent trim gained $3.49 to stand at $211.45. Fifty percent trim gained $4.83 over the prior week to stand at $48.38 as of Thursday morning.

Early industry estimates for last week were for a 635,000-head production week, which would be below that of the prior week. There is talk that packers may try to cut production to hold onto their recently reclaimed margins and keep product values high, but it is uncertain how much they can afford to cut given recent demand.

Feeder cattle

The cash feeder market was mixed, with some sales reporting feeders selling steady or up while others reported declining prices. Overall, demand was strong for light feeder calves.

Feeder steers were selling steady to $2 higher in the El Reno Livestock Market. Calves were generally $10-20 higher as cooler temperatures and the promise of rain gave hope to cattle feeders.

The St. Joseph, MO, Stockyards Feeder Cattle Auction sold a light steer and heifer calves sold mostly steady with a few small groups of yearlings trading $2-3 lower. A 750-pound steer sold for $140.10.

Feeder cattle futures had distinctly mixed performance over the week. August and September feeder futures opened the week at $140.90 and $140.73, respectively, then spent the rest of the week climbing. August feeders spent most of the week flirting with the $143 level—which was achieved briefly on Wednesday at $143.03—but shed all of its gains Thursday morning as corn started gaining again. By Thursday afternoon, August feeder futures had lost 20 cents to stand at $140.70.

September feeder futures, however, held onto their gains and maintained a positive spread over August, counter to the Monday open. By Thursday afternoon, September feeder futures were trading for $143.15, a $2.42 gain over the week-open.

The matter of feeder cattle supply is a large and continuing issue in both the cash and futures markets. According to Vetterkind, the shortage is overruling drought-related concerns.

“Yearling feeder steers continue in short supply across much of the country and this supply situation is being met by buyers who want to own them, despite current losses on fed cattle being sold now and poor feeding margins going forward.”

Darrell Peel, livestock marketing specialist of Oklahoma State University’s Extension, spoke at length regarding the impact of the drought in Mexico to the future of the feeder cattle supply in the U.S. According to Peel, imports of feeders from the Mexican state of Chihuahua—historically home to the country’s largest cow herd—have declined 32 percent compared to 2011. While U.S. imports of Chihuahua feeders were quite high relative to the norm in 2011, it appears the cow herd in that state has become nearly exhausted under the strain of continued drought.

Peel noted imports of feeder cattle from other Mexican states have increased, but current levels are not sustainable.

“It appears likely that significant cattle liquidation is occurring in the states of Sonora, Durango and Zacatecas, and possible in Nuevo Leon and the Tamaulipas as well. It is unlikely that the current rate of cattle exports can be maintained for many more months.” — WLJ

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