Choice values continue to disappoint

Jan 28, 2013

Cash cattle trade was sporadic and unusually distributed throughout last week, but at least trade wasn’t put off until Friday like in the past few weeks. Showlists were larger last week given the week-on-week buying apathy of packers in earlier weeks.

Monday saw some clean-up trade from the prior week’s light Friday trade at $205 dressed in Iowa, but only unanswered bids of $130-131 live and $208 dressed. As the week progressed, trendsetting trade cropped up, but it was all over the map. Early week saw cattle trade live from $126- 128, and $205 dressed in Nebraska, but only $201 in Kansas. Later week, the Corn Belt saw dressed trade run $203-205. Analysts expected by the close of the week trade would run mostly steady with the prior week’s $127-128 live and $203-205 dressed prices.

Live cattle futures were caught in a downward spiral last week. Compared to the prior week’s trade close of $132.95 for February contracts and $136.77 for April, Thursday afternoon saw the near-term contracts at $131.55 and $135.10, respectively. Not even deferred live futures were spared the losses, with August live cattle contracts seeing a $1.45 decline over the week at $130.30.

“Probably the biggest headwind facing the cattle futures trade this week is the start of index fund rebalancing today,” said Troy Vetterkind of Vetterkind Cattle Brokerage last week. “With estimates of them needing to sell 12,000 live cattle contracts through the week. Also the Goldman Roll of February longs begins today and they probably need to sell 30,000-50,000 Feb live over the course of the next 5 business days. Add to that we have a really wide negative basis in the February live cattle compared to last week’s cash and one would think February would have a hard time rallying very much this week.”

The issue of the interplay between beef production and product value continues to be a troubling one. Despite the two weeks of drastically reduced processing rates from the holidays, product values did not climb nearly as high as had been previously hoped. Last week, Choice product value faltered and dropped from the $194.26 it closed at on Friday afternoon of the prior week, and bobbed about within $193 for the rest of the week. By Thursday afternoon, the Choice cutout stood at $193.81.

The Christmas-week production rate was approximately 485,000 head and the New Year-week production rate was approximately 519,000 head, yet Choice product values were unable to get close to—let alone breech—the $200 level. From this it appears unlikely even the tightness expected this year will be able to drive values up to that level.

Last week’s industry-expected production rate was estimated at 625,000- 630,000 head with the rumored possibility of packers cutting hours late in the week. Despite this, Andrew Gottschalk foresaw a less than desirable outcome.

“This level of production will again overload current demand levels,” he said, referencing the lower 625,000-head number.

CME analysts in the Daily Livestock Report also weighed in on the issue and commented both from a market-interaction and consumer perspective.

“To sustain cattle prices above the $130 threshold [near term live cattle future values], we will need to see the cutout break over the $200 mark and then stay there, something that has been difficult to accomplish so far.

"Retail demand is critical to push the cutout above the $200 threshold, but so far, that has proved a tough nut to crack. In part, this is due to lower prices for competing meats (negative for beef demand). Consider how dramatic the change has been at the retail case in the last three years. The price of Choice regular trim beef in sides currently is hovering around $225-230, almost 40 percent higher than what it was in January 2010, a consequence of high cattle values.”

The Select cutout value was another story entirely. As things seem weak and unpredictable with Choice, Select is the little engine that could in terms of slow and steady upward progression. Compared to the prior week’s close at $182.22, each day throughout last week posted modest gains on Select value. By Thursday afternoon, Select was estimated at $183.96. This, of course, had the effect of narrowing the spread from just over $12 on the prior week’s close to $9.85 towards the end of last week.

The whole issue of retail and consumer demand is a troubling one which will almost certainly occupy attention and concern in the foreseeable near future.

‘“Supply’ is visible and a known quantity; ‘demand’ is invisible and unknown,” Gottschalk reminded. “Demand is the invisible onehalf of the total price equation. To dismiss demand as being nearly elastic as some do is a huge and serious misread of the consumer. Producers and packers win battles; consumers always win the war.”

And the consumer war is and has been tipping in favor of pork and chicken’s market share, particularly chicken in the last few weeks. As CME analysts pointed out, pork and chicken prices are roughly the same as they were this time three years ago, but the fact retail beef prices are higher continues to shift protein interest to other offerings.

Cut-specific demand was mixed but steady at the best of times. Choice ribs and tenderloins continued to struggle after their time in the sun prior to the holidays, but last week, even chuck and end meats lost their earlier momentum to sit at weakly steady.

End-of-the-year export data came out last week with the accumulated export sales of beef for 2012 at 841,400 metric tons (MT), up 4 percent from 2011. Sales of 11,800 MT for the first week of the 2013 marketing year went primarily to Vietnam, Japan, Mexico and Canada.

Feeder cattle

Cash feeder cattle markets got back into action last week after having taken a couple weeks of holiday break. Overall, the tone was strong and active.

At McAlester, OK’s, Union Livestock Market, feeder steer calves sold up $3-6 compared to their most recent Dec. 19 sale. Lighter heifer calves sold up $2 while heavier ones sold down $3-5. Slaughter cows were up $1-3 with the exception of breaker cows which sold down $2. Small packages of yearling steers near the 750-pound mark sold from $139.50-145.

The El Reno sale in Oklahoma saw every class of feeders sell up compared to their most recent sale. Yearling steers were up $2-4, yearling heifers up $1-3, and both sexes of calves were up $5-10. Demand was called very good on the moderate to attractive offering. A good representation of benchmark steers sold from $147.35-151.22.

Futures for feeder cattle suffered even more than live cattle futures last week. Compared to the prior Friday’s close of $153.32 for January and $156.32 for March, Thursday afternoon saw them at $150.80 and $152.88 for March.

Vetterkind mentioned the futures at the end of last week and beginning of this week would be especially sensitive to the results of the World Agricultural Supply and Demand Estimates report released last Friday.

Look for the recap of that year-end report in next week’s issue. — WLJ