Limited production doesn't drive product higher

Jan 4, 2013
by WLJ

In last week’s short New Year’s week, cash trade was slow to develop despite the pressure on packers to buy for their first full-production week in a while. Showlists were overall larger across the country with Kansas being the only major cattle-feeding state to see smaller showlists. Asking prices were $130- 131 live and $205-207 dressed with no bids surfacing by Thursday morning.

Analysts anticipated trade to take place late in the week with sluggish packer interest despite the need for cattle to kill at steady to a $1 up compared to the prior week’s $127 live and $202-203 dressed. Troy Vetterkind of Vetterkind Cattle Brokerage predicted all classes of cattle will sell higher this week and possibly next as cattle buying and processing gets back to business as usual after the holidays.

Vetterkind commented on some of the early-week losses in the live cattle futures.

“Futures sold off on Monday going into the close with some of the pressure coming from the lower hog futures market and I think some of the selling being end of the year profit taking.”

He further anticipated futures would get “a shot in the arm” from fiscal cliff deals, but that did not happen immediately. On either side of the New Year and the fiscal cliff talks, near-term live cattle futures struggled to move one way or the other, though both February and April contracts faltered compared to their prior Friday close of $133.58 and $137.58, respectively.

By midday Thursday, however, all stagnation of the prior days was left behind as early-day energy propelled futures higher. February live cattle stood at $133.85 and April contracts were $137.43. Deferred contracts also gained. For instance, August fed cattle were up to $132, a gain of 78 cents compared to the prior Friday’s close.

Product values held steady with the prior week and generally with the week before that, with Choice staying in the low- to mid-190s throughout the week, standing at $195.38 for Choice and $184.16 for Select by midday Thursday. This was decidedly not a good thing, however, as the two weeks of restricted production were expected to get product values up to, if not over, the $200 level.

“Product values have not responded as one would expect given the reduced production schedule,” reported Andrew Gottschalk of Hedgers Edge. Midweek, he reduced his weekly production estimate to 535,000 head at best.

“Why is this important to producers? Even when fed cattle supplies reach their tightest point, weekly production should be greater than this level. The inability to force product values up in the face of sharply reduced production is concerning. The risk to expected price advances this year is consumer demand; the early signs are not encouraging.”

This disappointing result of reduced production suggests consumer demand is flagging more than earlier thought. Considering the expected future of beef supplies and prices in the coming year, the possibility of beef’s lost market share is a distinct problem.

“The supply of fed cattle will gradually decline throughout the first-half of next year,” Gottschalk pointed out. “Tightest supplies should be realized during the April-May period provided somewhat orderly marketings are maintained. Annual prices are estimated to average $130 with an intra-year range of $120-$143.

“Be reminded that retail prices will lag fed cattle price by several months. If fed cattle prices top during the second quarter as projected, retail beef prices are unlikely to peak until the August-September period. The summer and fall period will provide the greatest challenge to beef demand.”

Over the course of last week, product values did post a net gain compared to their values at the close of the prior Friday of $194.15. Select was doing fine either way, gaining consistently throughout the week and thereby narrowing the spread.

During the short week, beef markets did surprisingly well despite the less than hoped for Choice cutout values. Choice ribs and tenderloins, being the favorites for holidays, are well out of the spotlight and trading for lower money as retail outlets look to replenish more everyday cuts.

Ground, boneless, chuck, end and thin meats, and even the rest of the loin area sold higher. This is both for quick shipping and forward delivery. Vetterkind opined that this will be supportive of cutout values going as far as mid-January.

Feeder cattle

As last week once again saw a mid-week holiday, very few feeder cattle auctions were held or had volume worth reporting. Some few held their first sales of the year, however.

The Huss Platte Valley Auction of Kearney, NE, saw steers selling fully steady to up $3 and feeder heifers up $2-4. Demand was called moderate from the normal host of buyers. Good-sized offerings of benchmark steers sold at $154.08 for those averaging 730 pounds and $150.34 for heavier steers averaging 770 pounds.

At Greenville Livestock Inc. in Greenville, IL, feeder steers and heifers traded up $0.50-1 but unsteadily while slaughter cows and bulls both traded steady. There were no benchmark yearling steers offered.

In Missouri, several sales posted returns on their first sales of the year, though many had a long time between this most recent sale and the comparison sale. Despite some locations holding sales, tests were unanimously light relative to comparisons. Yearling feeder steers and heifers were especially lightly tested but were generally called steady to up as much as $6. Benchmark yearling steers sold across the wide range of $140.55-155.46.

Slaughter cows and bulls were mixed but generally steady, with slaughter cows both up and down $1, depending on the location, and bulls were steady to down $1. Much of the availability and volatility was seen in feeder calves of both sexes. Lightweights were welcomed at steady to up $5, but heavier feeder calves were drastically different, depending on the sale. At the St. Joseph Missouri Stockyards, heavier feeder calves sold down $2-4, yet at Green City, they sold up $8-10. There was no note on the sale reports to indicate a quality difference or otherwise explain this wide divergence in prices.

Last week saw Congress’ mad dash to make an 11th hour decision on the fiscal cliff. And they did… eventually. On Monday, New Year’s Eve, the markets were bolstered by hopes of a decision and on Wednesday, the markets soared up over 300 points after they did indeed decide for a two-day combined gain of 474 points.

This saw some ripple effect in futures markets.

The prior week’s feeder futures closed at $152.03 for January and $154.73 for March feeders. Monday and Wednesday’s closes were slightly depressed from these levels and didn’t move much, but by midday Thursday—like live cattle futures—the contracts saw an energetic boost. January contracts stood at $152.53 and March was at $155.25.

While feeder futures had a delayed reaction to the upward movements of the general marketplace, corn saw the reverse. Corn futures were up modestly on Monday and early Wednesday, but by the close of trade on Wednesday, corn had settled lower than its prior Friday close of $6.94/ bu for March and $6.96’6/ bu for May. By Thursday afternoon, corn stood at $6.89’6/bu and $6.91’6/bu, respectively.

“Grains continue to succumb to liquidation as there is little positive news to feed a ‘bull’ case at this time. U.S wheat is very competitive in the world market while corn is being undercut by offers from Brazil and Argentina,” reported Gottschalk. — WLJ