High cutouts continue despite expectations

Aug 24, 2012

Cash trade trickled along the first half of the week unable to produce a market test. Bids generally trailed asking prices by $4-6 dollars. Asking prices for live cattle in the Southern Plains started the week high at $124, but gradually dipped down to $122-123. In the Cornbelt the same was true of dressed prices which saw an earlyweek high of $195, but moved downwards towards $192-193.

By midday Thursday, what minimal trade had occurred was below the previous week’s prices at $186- 188 dressed in Iowa and Nebraska, and $120-121 live in Texas and Kansas. The trade was too light for a market test, but analysts at the time predicted steady with the prior week was the best the market would muster. Rumors of a couple short-bought big-name packers couldn’t offset the domino effect of upward-running corn and waning retail demand.

Near-term fed cattle futures as of midday Thursday were down from their week-open levels of $121.13 for August and $125.30 for October. August futures lost 85 cents at $120.28 and October lost 42 cents at $124.88. That said, the damage of corn and expected declining consumer demand could have been much worse.

As August futures are on their way out, Troy Vetterkind of Vetterkind Cattle Brokerage turned his attention to October.

“There still remains a lot of near term overhead resistance in October live cattle between $126 and $127 and I would certainly expect that resistance to cap rallies until we get back from Labor Day. Downside support shows up at $123.50 and then at $122. That is likely your range for the next couple weeks and would trade it that way.”

Product values have remained high which, with most of the pre- Labor Day procurement already done, has led analysts to predict the seasonal top has been seen and will likely move down in this and coming weeks. That said, by midday Thursday, Choice cutout stood at $193.94—a weekly gain of 91 cents—and Select cutout saw a weekly gain of 30 cents to stand at $185.02. The spread was $8.74, up from the prior week’s spread of $8.31.

Trim values saw some very strong gains over last week as demand for ground formulations didn’t wane as much as other parts of the carcass. Ninety percent trim gained $1.08 over the week by Thursday to stand at $213.32 while 50 percent trim saw an exceptional $7.66 jump at $57.62 compared to the prior week’s Friday close.

This jump in 50 percent trim values has been attributed to a tight supply of fed cattle fat trim and slaughter cows in addition to the demand for ground. This in turn upped the value of both domestic and imported boneless beef. Other cuts haven’t faired so well. Middle and end meats began the week trading higher but moved lower into discounting as the week progressed.

Reportedly, manageable packer inventories and short-bought packers thinking about slowing kill rates may hold up prices in the face of a growing disinterest in the domestic market, but it is unclear how long that may last.

“Out-front business is lacking as retailers have little interest to gather inventory at current offering prices,” Andrew Gottschalk of Hedgers Edge pointed out. “Retailers are fully aware that higher cutout values will force them to raise prices which will continue to restrict their sales volume. Pork and chicken provide a much better alternative than beef.”

Export demand has been choppy. Last week 14,700 metric tons of beef were exported, a 30 percent decrease from the previous week and 16 percent down from the four-week average. The previous week, however, was 20,900 metric tons, which was 13 percent above the week before that and 30 percent above the then-fourweek average. Aside from the movement of the dollar relative to global currencies, there has been no real word on what’s fueling this manic up and down in export trade.

Last week expected a production week of 640,000 head. The early-week kill rates ran higher than weekto-week and year-to-year comparisons, but slacked then slowed as demand slowed mid-week.

Analysts still talk about packers thinking about slowing production to hold up prices, but if the demand isn’t there at currently high product values, its uncertain how useful that will be in the long-run. Packers have seen positive margins in the upper $40 area and it is understandable they’d want to hold onto that after the red status of past weeks.

Corn was being problematic last week. After closing the previous week at $7.98/ bu for September and $8.06’4/bu for December, the two contracts both gained roughly 32 cents by the close of trade on Tuesday. This seemed to play havoc with the near-term futures markets which all closed in the red that day. By midday Thursday however, corn had lost a good portion of its Tuesday gains to stand at $8.13/bu for August and $8.20/bu for December.

The Dow was playing payback most of the week for its rallying the prior week. Some analysts and economic commentators opined it was in an overbought state and due for some downward movement.

After having gained just under 300 points in the scope of the prior week, by midday Thursday last week it had lost 98 points at 13,176 with most commentators expecting it would continue down for the rest of the week. Reported slowdowns in the Chinese and European economies, particularly in the manufacturing sector, were credited with some of the later week downward movement.

Feeder cattle

Cash feeder markets were mixed depending on location, particularly considering the availability of feedstuffs and the liquidation of local cow herds. Demand for lightweights versus heavier animals traded places from state to state in which traded higher or lower.

“An early peak in seasonal feeder and calf supplies is expected this fall,” said Gottschalk. “The historically tight feeder and calf supply will limit downside pressure amidst record feedgrain prices.”

At the Winter Livestock Feeder Cattle Auction in Dodge City, KS, feeder steers were steady while a limited supply of heifers were trading steady to $1 lower. There was active interest in feeder calves, however, and they traded actively up $5-10. Slaughter cows and bulls were steady to $1 lower. A 750-pound steer sold for roughly $140.

In the numerous Missouri sales, feeder steers and heifers ran the gamut of down $5 to up $8. Buyers favored lightweights and calves over heavier animals and steers over heifers. The weight preference was reversed with cull dairy animals, with buyers wanting nothing to do with Holstein calves but paying $2 higher for wellfleshed yearling steers.

Slaughter cows and bulls were abundant as herds are being liquidated due to drought and traded steady at best to down $4. The observed destruction of the cow herd is leading many people to buy calves and light feeders, knowing there will be shortages coming. A 750-pound steer in Missouri auctions sold for a large range of prices depending on location—anywhere from $130 to $147—but most sold in the lower $140s area.

In Nebraska sales, trade was uneven and generally opposite that of Missouri. Calves traded steady at best to down $5 while generic feeder steers and heifers sold steady. Some 750-pound feeder steers bucked the trend and sold $7 higher at $148. Demand was said to be good.

At the Clovis Livestock Auction in New Mexico, feeder steers and heifers were called steady to $1 up on an uneven market. Slaughter cows and bulls were steady and made up 21 percent of the offering. No 750-pound steer reference.

In Torrington, WY, yearling feeder steers and heifers sold steady to $5 up on good demand. A 750-pound steer sold for roughly $145.

Feeder cattle futures faired better than their fed cattle counterparts, despite the mid-week price surge in corn. By midday Thursday, August feeder futures had gained 78 cents at $141.38 over Monday openings, and September futures gained 85 cents at $143.35.

As mentioned, there is a big pull between the price and availability of feedstuffs for cattle and the fact feeder supplies will be very tight in the near future. The continuing liquidation of cow herds forced on some cattlemen by the drought is making cattle feeders nervous and eager to own lighter animals in anticipation of sharply tighter supplies later on down the close-up road. How tight supplies will be in the near and extended future is unclear, but the prospects are motivating enough buyers who fear the worst. — WLJ