Packers cut kills to stall losses

Markets
Nov 9, 2012
by WLJ

Cash trade for fed cattle was slow to develop last week. By Thursday afternoon, only a few strings big enough to set a trend sold at $125 live in Nebraska. Other than that, activity was limited to offers of $128 live and $198- 200 dressed. Very light bids of $124 live in Kansas and Texas cropped up late Wednesday and Thursday morning, only to be passed over by cattle feeders.

Packers have been laboring under heavy losses in recent weeks, with most of last week and the week before seeing losses over $80 a head. This has resulted in even greater reticence on the part of packers to pay high prices for fed cattle. Packers are reportedly planning to continue cutting kill rates in an effort to repair margin losses, with last week projected to have a 626,000- to 630,000-head kill.

Continued—though recently reduced—losses suffered by cattle feeders help create near deadlocks on negotiations until the realities of late-week necessity forces action. Analysts last week expected fed trade would eventually develop on late Thursday or Friday down $1-3 from the prior week’s $126-127 live and $197-200 dressed prices.

Across the scope of last week, live cattle futures came out a bit ahead compared to their prior week close of $125.43 for December and $129.18 for February. At $125.58 and $129.38 by Thursday afternoon, respectively, both contracts eked out smallchange profits. Compared to the dip they saw on Wednesday of last week following the results of the election, however, their performance was admirable.

Troy Vetterkind of Vetterkind Cattle Brokerage predicted early last week that if the $125 level for December live futures could be maintained, $126-127 live and $197 dressed prices in the cash market would likely be seen this week due to market strength coming back.

Cutout values did increase slightly last week compared to the prior week close, but the advance in prices was quite restricted. Compared to the $192.74 Choice and $175.54 for Select, making for a spread of $17.20 on the prior week’s Friday close, last week saw Choice at $193.93 and Select at $176.16—a spread of $17.77—as of Thursday afternoon. Analysts expect product values will lose $2 by midweek this week.

Packers continue to be motivated to keep product moving to prevent pile-up of stock. This resulted in continued discounting of several cuts. Chucks, Choice and Select ribs, most all middle meats, and round were steady at best with several instances of discounting to keep product moving despite the lacking demand with the quick-approaching poultry- and pork-focused holidays.

Andrew Gottschalk of Hedgers Edge outlined a continuing and concerning issue facing beef given current prices and demand.

“Higher retail beef prices, necessary to support current fed cattle prices, do not occur without consequences; there is a cost in lost market share. The salvation for beef is if retailers elect to subsidize beef margins with their better retail pork and chicken margins. What we do know from market observation is that beef production levels over 630,000 head per week are too high for current demand levels. Lower weekly production will be necessary to overcome the barrier that exists at $198- 200 beef cutout values.”

Ground beef, and thereby boneless beef and trim, was the one bright spot in domestic demand last week. Despite the effects of Sandy laying waste and damage to the Northeast and damaging consumer beef demand, fast food operations are reportedly opening up again and filling a lot of the food needs of those without power. Imports of boneless beef have stepped up to fill demands, but imports from Australia have slacked as much of their product has been going to Asian markets lately.

Because of this demand boost for ground formulations, trim values have increased despite restrained cutout values.

Compared to the prior week’s close at $203.89 for 90 percent and $68.28 for 50 percent, trim values rose steadily last week. As of Thursday afternoon, 90 percent trim had advanced to $204.37, and 50 percent gained a tidy $7.61 with $75.89.

Export sales last week were impressive compared to recent receipts. At 19,400 metric tons sold, export trade was up 33 percent from the prior week and 28 percent from the four-week average. The majority of product went to the usual destinations of Mexico, Japan, South Korea, Canada and Vietnam.

Feeder cattle

In Sterling, CO’s Sterling Livestock Commission, light feeder steer calves traded sharply higher, up $6-10 while others traded mostly steady.

Light to midweight feeder heifers sold $5-7 higher. Slaughter cows and bulls traded mostly steady. Buyer demand was good to very good, especially for long-weaned and preconditioned calves. There were also many offerings of reputation cattle which had been well backgrounded. There were insufficient offerings of yearling steers on which to base a trend.

At the El Reno feeder cattle auction in Oklahoma, feeder steers were mostly $2-3 lower. Heifers were steady to weak. Calves of both sexes sold steady to up $3 with good demand for the preconditioned strings being offered. Few 750-pound yearling steers existed, but they sold for $140-145.

New Mexico’s Clovis Livestock Auction saw uneven trade with short offerings. Yearling steers and heifers were unevenly steady with instances of steers trading $5 lower. Slaughter bulls were steady and slaughter cows were steady to down $1. Yearling steers—what few of them were available— were all over the map with a group of seven fleshy 744-pound steers selling at $111.21, and group of nine 780-pound steers selling at $133.73.

Missouri’s many auctions were mixed on feeder animals but closer to steady than in recent weeks. Yearling steers were still hard to find, but were mostly steady with instances of down $5 for very light animals and instances of up $5 for particularly attractive heavier cattle. Feeder heifers were mostly steady. Few auctions reported 750-pound yearling steers, but they ranged from $139-156.38.

Feeder calves were mostly up in both sexes with preference going for lighter animals. Both steer calves and heifer calves brought steady to $5 higher money, particularly on the reputation, preconditioned calves. Heavier calves of both sexes were not as desirable with both bringing about $1-2 less than the prior week.

Slaughter bull and cow markets were generally down $2 around the Missouri auctions, but bred cows and pairs brought in good money with ready demand. The now-common dispersals, while unfortunate for those choosing to pack up and call it quits, are benefiting those interested in growing their herd. Bred cow buyers are reportedly coming from far distances to buy these cows.

Unlike their live cattle analogues, feeder cattle futures saw a modest retreat last week. Compared to the prior week Friday close of $144.90 for the November contract and $146.68 for the January contract, feeder futures lost money in the course of the week. November feeder futures dropped 45 cents by Thursday afternoon with $144.45, and January feeders lost 95 cents at $145.73.

Gottschalk pointed out the effects of the USDA feeder cattle and calf supply report.

“The Y/Y decline was 227,000, much less than the trade was expecting. Given the sharp decline in October placements and the expectation of lower fourth quarter placements, this supply of feeders and calves will post a Y/Y gain by Jan. 1. This would be the first Y/Y gain in this supply since 2008. Be reminded that this Y/Y supply increase is not the result of a larger calf crop.

Rather, the increase is the direct result of the sharp Y/Y drop in placements during the third quarter of 917,000 head and a decline in October estimated placements of an additional 330,000 head.”

Outside markets saw a significant negative impact from the election last week. On Wednesday, the Dow dropped almost 313 points, roughly 2.3 percent, with Thursday seeing it lose another 100-plus points to stand at 12,828.56 by Thursday afternoon.

This had a ripple effect on other markets both outside and inside the beef world. As mentioned, both live and feeder cattle futures were slight depressed on Wednesday, but bounced back.

The election results and concerns over the fiscal cliff and the continued mixed Congress have put investors on the wary defensive. Several analysts have commented that market optimism might pick up if some sign of Congress being capable of cooperation comes to light, but otherwise might remain relatively fearful for the rest of the year. — WLJ

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