Cash trade down

Markets
Jan 18, 2013
by WLJ

Cash fed cattle trade struggled last week as signals of disappointing consumer demand and unsupported futures levels eroded prices both buyers and sellers could agree on. Following the prior week with its mostly $125 live and $202-204 dressed prices (already a few dollars lower than the week before that), last week saw sporadic weak trade at $125 live in the south Plains, $122-125 live and $196-199 dressed in Nebraska, and small batches of dressed cattle selling for $200 in Iowa and the Corn Belt.

As the week progressed, the lower numbers on the ranges mentioned were more common. Early-week expectations for the balance of the week’s trade to be in $125-126 live and $200-202 areas appeared to be premature. Expectations of continued weakness going forward into this week were voiced later on last week.

Last week was another week of steady—and at times concerning—declines in both classes of cattle futures. In live cattle futures, the downward trend was clear early in the week. Compared to the prior Friday’s $130.60 for February cattle and $134.55 for April live cattle, Thursday afternoon saw those same contracts over $3 lower at $127.25 and $131.50, respectively. Though painful, these Thursday afternoon numbers were not as painful as some earlier in the day when confirmed news of the Cargill plant closure (see the story about it on page 3) cratered trade, at one point bringing it limit down. The deferred contract of August also lost considerable money—down $2.52 also at $127.25 compared to $129.77—though it was not as bad as near-term contracts.

As has been the trend of recent months, the issue of demand not supporting production continues to dog the beef market. With the vastly restricted production weeks of the holidays demonstrating an inability of the market to move cutout values to needed levels, there is little hope even the natural supply tightness of the coming year will move the value dial sufficiently.

“Demand will simply not support a production level much over 600,000 in a full production week,” said Andrew Gottschalk of Hedgers Edge. Last week, industry estimated a production week of 620,000- 624,000 head with laterweek talk of reductions to activity.

Even with the declining production rate last week, Choice cutout values were on a downhill slope. Compared to the prior week’s Choice cutout close of $194.24, that product value did nothing but decline through the week, settling at $192.20 by Thursday afternoon. As with the prior week, however, Select did comparatively well as more consumers turned to lower-cost beef options. By Thursday morning, Select had climbed to $185.56, a gain of $2.07 compared to the prior week’s close.

“Beef product markets remain lackluster,” Gottschalk summed up. “As discussed often in these comments, demand for beef at these prices and this production level is less than stellar. To call it rotten might be a bit excessive, but disappointment from the sellers is obvious. Economic satisfaction for the average household is difficult to find, as paychecks shrink from higher taxes and withholding levels and overall household income remains stagnant. The consumers are still buying; but they are buying smaller quantities. This is especially noticeable in the higher end items, i.e. beef.”

Another issue of the stillhigh prices—even if they are not as high as the industry needs or would like—is their effects on export demand. While speaking of sluggish export demand for some traditionally well-exported cuts to Asian markets, CME commentators gave the example of beef prices and currency fluctuations on beef trade with Japan.

“The value of the U.S. dollar vs. the Japanese yen has gained ground and this has added to the price that Japanese buyers have to pay for U.S. beef. In early October, 100 Japanese Yen would buy you about $1.28 worth of U.S. beef. Today, that same 100 Yen buys you $1.13 of U.S. beef, a 12 percent decline in purchasing power. In the meantime, cattle prices have jumped from about $123 in early October to about $128-129 today, a 5 percent increase. You add these together, and this does not bode well for exports to Japan.”

But all is not doom and gloom on the cattle-related export markets. According to the Livestock Marketing Information Center, the value of beef byproducts, particularly hides, has increased in value in overseas markets nicely.

“Typical hide prices in 2012 averaged 4 percent over 2011’s. Large yearover-year gains occurred in the second half of the year. Each month since August, hide prices set all-time highs and December’s jumped 33 percent above a year ago.”

The value increase in hide exports reportedly stems from both increased demands for luxury leather goods in other countries and the reduced production rates. Overall annual average byproduct value for 2012 was reportedly just a cent below 2011’s recordsetting average.

Feeder cattle

Just as with live cattle markets, last week saw cash feeder cattle trading down as well.

In New Mexico’s Clovis Livestock Auction, light feeder steers were mostly $5-6 lower while other weight classes were steady. Light feeder heifers were down $3-6 while other classes were only steady to down $1. Slaughter cows were $1-3 lower, except high yielding cows which were steady. Forty-four head of yearling steers averaging 781 pounds sold for $144.09.

At the El Reno sale in western Oklahoma, feeder steers and heifers were $3- 5 lower. Steer calves sold down $2-4 with some instances of sharply lower money on lesser-quality calves. Particularly light heifer calves traded steady to up $3 while all others were down $3-5. Roughly 800 head of benchmark steers sold in the range of $144-148.

In Missouri’s many auctions, the only class of cattle to see higher money was very light calves of either sex, which traded steady to up $5, and slaughter cows which were steady to up $1. Feeder steers and heifers were overwhelmingly down from ranges of $3-8, with the best prices being steady. Slaughter bulls were poorly tested in most sales which saw them offered, but they were quoted down $2-5.

Large numbers of benchmark steers seem to be hitting markets in Missouri relative to recent trends. Sale prices ranged from $137.26-151.37 with the lowest prices quoted at the Farmington Livestock Auction and the highest at the Green City Livestock Auction.

Futures for feeders were also painfully down last week compared to the preceding week with concerning drops early on Thursday. Compared to the prior Friday, where January feeders closed at $149.87 and March with $151.45, both near-term futures contracts lost over $4 by Thursday afternoon at $145.63 and $147.33, respectively.

Like live cattle futures, Thursday morning saw some concerning intra-day value drops to the tune of $2.50, but the losses receded as the day progressed. It was speculated the Thursday losses to the futures markets might have come in part from the Cargill plant idling news. But the early-week declines likely came from the value gains seen in corn futures.

Following the release of the most recent World Agricultural Supply and Demand Estimates report on the prior Friday (see coverage of the report on this week’s WLJ cover), nearterm corn futures had gained over 30 cents/bu.

By Thursday afternoon, some of the upward momentum of corn had pulled back, but March corn was still at $7.23/bu and May corn was right there with $7.23’6/bu.

“The feeder cattle futures are suffering from lower cash feeders/fats and higher corn,” commented Troy Vetterkind of Vetterkind Cattle Brokerage early on in the week. “I would tend to think that the March contract needs to hold the $150 area to keep further selling out of the market. The fundamentals of the cattle market aren’t all that bullish right this second so I am going to assume that unless we see funds come in to support their long live cattle position we could see further weakness in the market.”

It also has yet to be seen what the Cargill plant idling may do to the feeder markets, both live and cash. With production outstripping demand as it is, and plants slowing production both because of attempts to bolster values and because there aren’t enough cattle available to keep the places running at economic speeds, the next few weeks will certainly be interesting. — WLJ

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