Cutout values expected to increase

Markets
Oct 12, 2012
by WLJ

The cash fed cattle trade was slow to develop last week. By Thursday midday, very few bids had been posted at $122 live in the South Plains and $188-190 dressed in the Corn Belt. These were generally passed over by packers, well aware of smaller showlists, short-bought packers and the tight supplies. Asking prices were set at $125-127 live and $193-196 dressed. Analysts expected cattle feeders would get those asking prices by the end of the week, projecting trade at $126-127 live and $194-196 dressed.

A few small sales did occur earlier in the week—one load in the South Plains at $123 live and 220 head in the Corn Belt at $190 dressed—but it was not sufficient to establish a trend.

Near-term fed cattle futures were mixed last week. As of midday Thursday as compared to the close on the prior Friday, October live cattle futures gained $1.48 at $124.53. December fed cattle contracts, however, lost 17 cents at $126.03.

Product values continued upwards slowly last week. Compared to the prior week close of $189.99 for Choice and $175.64 for Select, both cutouts gained a couple dollars. The USDA morning cutout value estimates on Thursday placed Choice product at $191.46 and Select at $177.88 with a spread of $13.58.

Despite the upward movement in cutout values, indicators suggest product values will—and more than that, must—move higher in the near future.

Andrew Gottschalk of Hedgers Edge pointed to recent packer behavior as reasoning.

“Given the reduced production level for two consecutive weeks, the beef cutout should advance to the $195 level.”

Packers have been purposefully cutting production rates over the past weeks to bolster value and hopefully recoup the losses they’re facing. Last week, packers were losing about $35 a head. Last week’s industry-expected slaughter was estimated at 630,000 head.

CME commentators were more focused on futures as a compass to product value needs.

“Since mid-August, out front cattle futures have pulled back by about 200 points or so but still they are pointing to record high cattle prices. Cutout levels will need to climb well over $200/ cwt (all time record) to justify paying $130 for live cattle.”

As has been mentioned often and by numerous sources, the danger with increased product values is the subsequent increased retail costs to consumers. As beef prices at the meat case continue higher, more and more market share is lost to the relatively cheaper competing proteins of pork and chicken. It’s already been noted that retailers are diverting more of their promotional time and efforts away from beef.

Despite this concern for the future, cut-specific retail demand was fairly good last week. While demand for ground, loins, other middle meats, and most any steak cuts were mostly down or steady at best, chucks, rounds and end meats were well supported. Export demand for chuck, brisket and round is competing with growing domestic demand as retailers are interested in getting product ahead of traditional roasting seasons and holidays. Add to this mix the short supplies packers have of these cuts and everything trades higher.

Trim values have remained relatively low for this time of year. USDA’s value estimates for Thursday placed 90 percent trim at $201.76 and 50 percent trim at $51.74. CME points out that this has had negative impacts on the value of the beef carcass, as trim generally accounts for 10 percent of the overall value.

“The price of 50CL beef trimmings continues to run around $50/cwt compared to last year when fat beef trimmings were over $100/cwt in October and November. Demand for fat trim has dramatically declined now that most retailers and foodservice operators no longer accept LFTB (lean finely textured beef) in their formulations (LFTB was made using a significant amount of fat beef trimmings).”

Feeder cattle

Yearling feeder cattle are quickly becoming an endangered species in this market.

Yearling feeder steers were being bought up when available last week at sometimes huge increases compared to the prior week. Where available—and it wasn’t frequent—a 750-pound steer was selling in the upper $140s to lower $150s.

In Missouri’s copious feeder auctions, yearling steers traded up $4-10 for lightweights, steady on midweights, and up $2-5 on heavyweights. Yearling heifers didn’t fare quite as well, trading mixed down $4 to up $5, depending upon the area, but lightweight heifers with replacement potential were selling up $10 in some places. A yearling 750-pound steer sold in Missouri auctions at $142-150 with the average around $147.

Calves, on the other hand, were mostly down for both steers and heifers. Both classes were regularly down $2-4, though some mild interest was paid for lighter fancy calves, which traded up $2.

Slaughter bulls and cows in Missouri auctions were generally down. Bulls were steady at best but often down $1-2 compared to the prior week. Slaughter cows were similarly steady at best to down $2-3. Bred cows, pairs and open cows from good genetics made available by dispersals, however, received good demand and a lot of interest from those who had grass.

At the Winter Livestock Feeder Cattle Auction in Dodge City, KS steers sold generally steady, with midweight steer calves selling $1-2 lower and heavy yearlings up $2. Heifers were not well tested and slaughter cows and bulls were called steady. A 750-pound yearling steer would fetch $144-150.

In El Reno, OK, feeder steers sold steady at $140- 145. Feeder heifers were steady to $1 down. Light calves saw some demand with steers trading up $4-8 and heifers up $2-5. Heavier calves were steady to down $2.

At the Clovis Livestock Auction in Clovis, NM, the trend was slightly reversed. Light yearling feeder steers were seeing a $5 decline on trade prices from the prior week, while midweights traded up $6-8 and heavyweights were steady. There was a light test of heifers which sold up $2. A 750-pound yearling steer brought $144.

Troy Vetterkind of Vetterkind Cattle Brokerage summed up the feeder cattle situation well:

“For the most part, the yearling run of cattle for the late summer/early fall has all but dried up and we won’t see many more yearlings offered to the market until after the first of the year. This should keep the market somewhat supported on these bigger cattle as buyers will be willing to pay for them where they can find them.”

Feeder cattle futures were doing decently last week— staying roughly steady with the prior week’s close—until Thursday morning. The release of this month’s World Agricultural Supply and Demand Estimates (WASDE) report with word of a declining corn crop and yield sent corn futures almost level up which, in turn, sent feeder futures down a couple dollars. After opening Thursday at $144.60 for October feeder cattle and $146.40 for November feeders, movements in the corn futures saw feeder contracts at $142.73 and $143.88, respectively, by midday.

Corn futures had a similarly sleepy week last week punctuated by excitement following Thursday’s early morning WASDE release.

Up to Wednesday’s close, near-term corn contracts had slowly shed about 10 cents each relative to the prior week’s close at $7.48/ bu for December corn and $7.48’4/bu for March. Following the report’s release, however, corn futures made up the lost ground and then some, standing at $7.73/bu for December and $7.72’6/bu in March by midday.

For detailed coverage of this month’s WASDE report and the state of U.S. corn supplies, see Traci Eatherton’s overview starting on the front page. — WLJ

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