Surprise rally in futures

Markets
Dec 14, 2012
by WLJ

No trend-setting trade had developed by Thursday afternoon last week. Expectations of continued sluggish demand, packers with plenty of contract cattle to work from, and futures making a steady upward run made for little motivation on the packer side. A few loads of cattle sold in Iowa at $198 dressed on Wednesday, which would be steady with the week prior, but the volume was insufficient to set the market.

Offers were mostly $126-128 live and $198-200 dressed range. By midweek some bids had developed, but they trailed asking prices by a few dollars. Bids of $121-123 live in the Southern Plains and $193- 195 dressed in the Corn Belt were ignored by cattle feeders who had their eyes to the ever upward fed futures board.

Live cattle futures saw a fun and unexpected run-up in value last week.

“Futures exploded higher [Tuesday] on fund buying that caught shorts in the market the wrong way,” reported Troy Vetterkind of Vetterkind Cattle Brokerage about the rally. “Open interest in live cattle went down 5,200 contracts yesterday indicating heavy short covering. Rumors [Tuesday] were that the rally got kicked off by floor traders in the pit after they heard deliveries were going to slow considerably.”

From Monday’s to Tuesday’s close, December and February live cattle contracts gained 95 cents and $1.68, respectively, closing Tuesday at $126.55 for December and $131.95 for February. By midday Thursday, futures had shed some of Tuesday’s rally, standing at $126.20 and $131.55, respectively, but were still holding onto gains relative to the week’s open.

Continued weeks of reduced production rates might have paid off on last week’s cutout values, though the excitement of the futures might have played a part, too. After seeing the previous week end with Choice cutout at $192.95 and the Select cutout at $172.39, the later week saw both products gain several dollars. By Thursday, Choice had gone to $195.55—a gain of $2.60—and Select stood at $175.59—a $3.20 gain. The spread suffered slightly, going from $20.56 at the prior week’s close to $19.96 on Thursday.

Early-week movement of specific cuts—largely choice ribs, tenderloins and short loins—last week also had a hand in the upward movement of cutout prices.

The strong prices seen for those more traditional holiday cuts slacked off through the week as it appears even wrapup purchasing for holiday demands came to a close. As this seasonal demand for these cuts was a lot of what was holding up the cutout rally of last week, the anticipated decline in interest will likely see cutout values retreat this week. Chuck and round cuts saw discounting in packers’ continued efforts to move product despite lackluster consumer demand.

Thin meats and end meats for grinding, boneless beef, and both types of trim saw decent trade last week as demand for ground beef rose on fast food orders. Also helpful is the fact processing plants in Australia and New Zealand will soon be shutting down seasonally, meaning the availability of imported boneless beef will continue to be tight from that sector.

Overall, consumer demand is still said to be sluggish with expectations of the condition to continue. This, plus the reactions to negative packer and feeder margins, is setting up a situation where the beef world is effectively taking aim at its own foot.

“Beef will become increasingly less price competitive next year and the loss in market share to the competing meats will only accelerate,” warned Andrew Gottschalk of Hedgers Edge.

“While the unemployment level has declined the decline is mainly the result of individuals dropping out of the workforce. New job creation remains lethargic and is mostly the result home grown businesses which have a high failure rate. In short, corporate America, is not posting any net job growth. Consumer income continues to be squeezed. Maintaining total beef demand in this environment will be the challenge as higher fed cattle prices force retailers to advance their prices.”

Packer losses last week came down some. Compared to the week before which saw per-head losses in the $80s, last week saw the losses decline from $69.45 to just $26.18. Still a loss to be sure, and enough to maintain the motivation of packers to cut production, but far better than it could be… and has been.

Exports of beef last week were down 10 percent from the week prior, and down 3 percent from the four-week average at 12,700 metric tons. Exports this week and in the near future have the potential to be troubled even further given Russia’s recently announced requirement U.S. beef and pork exports be accompanied with documentation they are free of ractopamine residues. Read more about the trade issues with Russia on the back cover of today’s issue of WLJ.

Feeder cattle Feeder steers sold up $4-6 at the El Reno sale in Oklahoma last week. Heifers sold up $3-4 and calves of both sexes sold up $4-8. Demand was very good for all classes and quality of the offering was mostly very attractive. Over 500 yearling steers averaging 728 pounds sold at $151.04.

The Winter Livestock Feeder Cattle Auction of Kansas saw feeder steers sell firm to $3 higher compared to the week before. Feeder heifers were firm to $2 higher. Calves weren’t heavily represented but were said to sell firm with good demand for all classes. Forty-eight 775-pound yearling steers sold for $150.09.

In Missouri’s many sales, just about everything was looking up. Yearling feeder steers were trading steady at worst where reported, with some trading as high as $6 up from the prior week. Heifers saw a high of up $5 in some places. Calves were mixed, with less of an offering than in the past. Light steer calves traded up $4-7 and the prices for light heifer calves seemed to depend on where you were, with some locations seeing them discounted as much as $5 while others saw them trading up $5-8.

Slaughter bulls were called steady in all sales which featured them, but cows certainly shined. Lean cows were steady to up $2, boning cows were up $2-5, and breaking cows were up $6-8, with most sales being $7-8.

Live cattle futures were outshone last week in terms of rallies and holding onto gains. The prior week ended with January feeders at $148.78 and March at $151.15. Yet by midday Thursday, those contracts were up to $153.03 and $154.95— gains of $4.25 and $3.80, respectively. This jump saw both flirting with their resistance levels.

Last week saw the release of the most recent World Agricultural Supply and Demand Estimates report (see the story on the front page) and it held no surprises for the market. One interesting result—though how causally they are tied is uncertain— was that near-term corn futures saw a steady decline in prices last week following the report’s release.

Starting the week on the prior week’s close of $7.32’6/ bu for December corn and $7.37’2 for March corn, the two near-term corn contracts had lost about 20 cents each. By Thursday midday, December corn stood at $7.11/ bu and at $7.17/bu for March. — WLJ

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