Product values continue downward movement

Markets
Jan 25, 2013
by WLJ

There were almost no bids recorded last week, though trade did develop lightly by midweek. In the south Plains, live cattle traded at $122 and at $121-122 in the Corn Belt. Dressed cattle saw Corn Belt trade at $193 with instances of $194 in Iowa. These trade prices represent a $2-3 drop in live cattle prices compared to the prior week and a $3-5 drop in dressed prices. By Thursday afternoon, some dressed trade had been noted at higher money—$195-197—in Nebraska, but how representative it was of potential trends was questionable.

Live cattle futures started off the week on shaky ground, looking like they were going to continue their downward plunge from the prior week. However, the downward trend reversed itself. Some analysts questioned whether the markets were experiencing a “dead cat bounce”—i.e., when dropped from a high enough point, anything, even a dead cat, will bounce upwards after a fall—but continued upward movement throughout the week suggested otherwise.

By Thursday afternoon, nearterm contracts stood at $126.67 for February and $131.13 for April, a gain of $1.72 and $1.31, respectively, compared to the prior week’s close. The more deferred August contract also gained $1.73 with $128.25.

“Cattle futures managed to settle higher again yesterday despite the lower cash fed cattle and feeder cattle markets,” said Troy Vetterkind of Vetterkind Cattle Brokerage on Thursday morning.

“Some of the price strength in the futures yesterday can be attributed to covering short hedges, but open interest went up 6,300 contracts on the midday rally, which would indicate new buying. The way the futures acted yesterday it could possibly indicate that this week could be the low week in the cash fed cattle trade so we’ll have to wait and see if last Friday’s lows hold for the balance of the week.”

Product values continue to disappoint as production continues to outstrip demand—both domestic and export. After posting a downward week the prior week and ending with $189.84 Choice and $182.61 Select, last week continued the trend. By Thursday afternoon, product values stood at $188.15 and $182.30, respectively. This, of course, saw the spread shrink significantly relative to even a month ago with only a $5.85 difference between the two.

Production the prior week was estimated at 615,000 head, and last week’s was expected to be 620,000 head at most. Andrew Gottschalk of Hedgers Edge repeated his statements of recent weeks that such production levels are too high for current demand.

“Consumer demand, which has been suspect since September, remains weak with no apparent reason for any improvement on the horizon. Consumers’ paychecks are taking a hit, which will require consumers to reconsider the allocation of their disposable income.”

In the current situation, that which is generally considered an asset—heavy carcass weights—could very well become a liability given the lackluster demand.

Using the prior week’s numbers as an example, CME analysts pointed out Monday of last week, “total weekly cattle slaughter was estimated at 615,000 head, down 0.7 percent from year ago levels. However, the average carcass weight of all cattle now stands at 803 pounds, about 25 pounds or 2.7 percent higher than a year ago. Total beef production for the week was about 2 percent higher than the same week a year ago.”

They continued on to say, “Cattle slaughter is expected to decline in the coming weeks but the heavy weight will blunt some of the decline in numbers.”

Export demand continues to disappoint, but there is some hope from Japan in the near-term. The long-awaited easing of cattle age restrictions for beef exports into Japan may be implemented as soon as Feb. 1.

“Of course, we have heard that story several times over the past couple of years,” noted CME analysts with caution. “But Reuters reported on Tuesday the Japanese Health Minister said last week the limit would be raised to 30 months on Feb. 1 if a medicine and food panel approve it at a January 28 meeting. The change would expand the pool of cattle from which Japanese exports could be drawn. It would apply to cattle from Canada, France and the Netherlands as well.”

As with depressed product and cash cattle prices, cutspecific values were mixed, with recent stars trading down last week. Production of chuck, round and ground is outpacing demand, but there is some thought the spotlight might be swinging back to middle meats as we approach February. Choice and Select ribs traded steady to slightly higher last week while tenderloins were mixed throughout the week with interest returning after some discounting.

Boneless and cow beef was steady to up with expectations of tightening supplies of cull cows coming to market domestically, and continued reductions in boneless imports from Australia and New Zealand. Boneless beef also saw interesting numbers coming from the most recent Cold Storage report, which came out Tuesday of last week. While overall frozen beef supplies were 5.4 percent larger on Dec. 31 than in November, boneless beef—which comprises about 85 percent of the total in most months—was 1.7 percent lower than the same time last year.

Feeder cattle

In western Oklahoma’s El Reno sale, yearling feeder steers sold $1-2 lower with cattle over 800 pounds trading $3-4 lower. Feeder heifers were $2-4 down. Higher quality steer calves sold steady with the prior week while heifer calves sold $2-4 lower. Decent volumes of benchmark yearling steers sold from $143-146.

The Winter Livestock Feeder Cattle Auction of Dodge City, KS, saw midweight feeder steers trade up $1 with heavyweights a weak steady to down $2. Feeder heifer supplies were low but said to have a weak undertone. A group of 220 yearling steers averaging 782 pounds sold for $144.49.

In Missouri’s many auctions, sales were mostly down compared to the prior week with offerings of yearling feeder cattle being down in volume. Yearling feeder steers were mostly steady at best, with many sales being quoted down $2-4. The exception was with lightweights which sold steady to up $2-3. Benchmark feeder steers were less numerous than in prior weeks and ranged from $127.20-143.23.

Heifers in Missouri sold steady at best but generally down $2-4. Heifer calves were all over the place with mostly steady but instances of both up and down $2, and at one point, lightweight heifer calves went for $6-9 higher. Steer calves were steady to up $2. Slaughter cows ran the gamut of down $5 to up $3, and slaughter bulls were roundly called steady.

Like live cattle futures, feeder cattle contracts saw improvements last week compared to the week before. Thursday afternoon saw feeder contracts trade at $144.85 for January and $148.40 for March, representing gains of 95 cents and $2.05, respectively, versus the prior week’s close. Deferred feeder contracts did even better with May feeders posting a $3.53 gain on Friday’s close with $154.65.

Like packer margins, cattle feeding margins have long been in the red. Recent analysis from the Livestock Marketing Information Center suggests feeder losses for November and December of 2012 were in the $120/head area. This is a good deal better than the record losses of $314/head in July 2012, where expensive cattle and expensive feed created a perfect storm for feeders, but still not good.

Corn prices retreated somewhat last week following their post-WASDE report release run-ups in the prior week. Near-term corn contracts lost 4 and 6 cents, respectively, on March and May contracts versus the prior week’s close to settle at $7.23’2/bu and $7.23/bu. Gottschalk called this move stabilization but posited the break would not be very pronounced if it continues. — WLJ

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