Consumer uncertainty hurts demand

Markets
Feb 8, 2013
by WLJ

The cash live cattle trade was slow to develop last week as packers tried to play chicken with cattle feeders over buying inventory. Offers were firm at $127-128 live and $205 or more dressed. Limited bids of $123 live had surfaced in the south Plains by Wednesday, but beyond that, packers were silent on bidding and cattle feeders weren’t biting. This had analysts predicting very late-week trade, though they also predicted trade would eventually develop at steady to slightly higher money compared to the prior week’s $125-126 live and $200-202 dressed.

By Thursday afternoon, no bids or sales were reported, pushing off any trade that might occur onto Friday as expected.

Live cattle futures saw a nice lift at the end of the prior week on the heels of a bullish Cattle Inventory report (see coverage of the inventory report on the front cover of this week’s WLJ) but the honeymoon didn’t last long. February was the one exception. February live futures managed to not only hold onto its gains following the inventory report, it gained 35 cents at $127.45 by Thursday afternoon.

The other near-term live cattle contract of April dropped 74 cents at $131.43 and the deferred contracts of August and October lost $1.04 and $1.32, respectively, having settled at $127.63 for August and $131.68 for October.

Troy Vetterkind of Vetterkind Cattle Brokerage opined April live cattle contracts are important for the market overall.

“The next big test for April live will the ability to hold this $130-131 area. If they can’t, the market is in trouble, but I think they might be able to. Time will tell.”

Packers are supposedly getting serious about cutting production rates. Though reports vary, last week’s industry expectation was for anything from a 600,000- to 615,000-head production week. Vetterkind, who was one of those reporting the higher industry expectation, said the effort was to prop up the markets, which are under threat from slacking domestic and export demand, and were last week barraged with considerable negative economic data releases.

Andrew Gottschalk of Hedgers Edge outlined a number of these economic details.

“Demand remains a major concern with the restaurant industry reporting slowing sales,” he began. See WLJ’s coverage of the Restaurant Performance Index on page 33 of this week’s issue.

“Likewise, Sysco foods indicates sales have softened on weak consumer sentiment and ongoing economic pressures. McDonald’s has indicated they may report declining sales for only the second time in the past 10 years. They say worldwide sales have also slowed.”

Additionally, the continued retraction of consumer spending (i.e. confidence) has not been helped by the return of the payroll tax. Gottschalk gave a brief history lesson on this point of consumer behavior and economic times.

“Since 1948, annual GDP growth of less than 2 percent has preceded recessions. The GDP growth rate last year is projected at only 1.5 percent. Consumers are retrenching for whatever reason, tax increases, the hike in gasoline prices, unemployment, but more importantly uncertainty about the future is restraining individuals and corporations from investment and spending.

“If this condition prevails much longer, annual price estimates for beef may need to be adjusted significantly below current estimates. Although we would not expect a repeat of 2009’s price action, that year should serve as a vivid reminder that both per capita supply and prices can decline at the same time.”

Product values did see some upward movement last week, a result of the attractiveness of their levels after the multi-week decline they’ve seen. After closing the prior week at $182.56 for Choice and $178.62 for Select, Monday of last week began to see a reversal. By Thursday afternoon, Choice had gained 90 cents at $183.46 and Select had gained $2.51 at $181.13. This of course brought the spread to a razor thin $2.33.

Even while cutout values edged slightly higher last week, cut-specific values were still largely depressed. End meats were the biggest liability to the overall cutout value and rounds specifically were having trouble.

Loins and some formulations of ground were similarly pressured as availability outstripped demand.

Ribs, chucks and some loin cuts did see some support later on in the week, and packers had hopes round might find some support in the near future as short-bought buyers mix favorably with diminished production weeks. The ongoing threat of Russia blocking all imports of beef and pork from the U.S. on concerns over ractopamine residues continues to be an issue.

Like domestic demand, export demand last week was sluggish. Net beef sales were 9,700 metric tons with most going to Mexico, Canada and South Korea. Weekon-week declines were noted for Japan.

Feeder cattle

In the Torrington Livestock Commission Co. of Wyoming, light steers sold $4-6 higher while heavier steers sold anywhere from steady to down $4. Heifers were $2-4 lower. Several packages of benchmark yearling steers sold for $143.50-150.50.

The Clovis Livestock Auction of Clovis, NM, had no comparison on feeder steers and heifers due to limited comparable sales, but a higher undertone noted. Holstein steers were up $5-7 higher than last month’s few comparable sales. The few near 750-pound steers which were seen were said to have sold for $147-148.

In Missouri’s numerous feeder and stocker sales, most auction audiences wanted lightweights and were willing to pay for them. With the exception of the Ozarks Regional Stockyards, where it seemed no one wanted lightweight steers or heifers—to the tune of down $10-15 and down $4-6, respectively—prices for lighter feeder animals ranged anywhere from steady to up $15, with heifers being of greater interest to buyers.

Midweight feeders were generally steady at least across the auctions with some trading up $2. Heavier animals were mixed—some places up $6 and other places down $5—but overall, “steady” was a common element. Yearling, 750-pound steers were not particularly numerous, but came in the range of $135-149 with most tending towards lower-$140s.

Slaughter cows and bulls did well in Missouri’s sales last week with bulls running unanimously steady and cows being steady at worst with most being up $2 with instances of up $4.

Near-term feeder futures fared poorly last week with both contracts shedding over $1.50 since the close of the prior week. Deferred contracts didn’t do too much better. Compared to a priorweek Friday close of $149.20 for March feeders and $152.12 for the April contract, March lost $1.95 with $147.25 and April had $150.55, a loss of $1.57. The farther out contract of August lost $1.14 with $158.93 by Thursday afternoon.

This time, the interplay between the live and the feeder futures could play out badly for all involved.

“The old saying is ‘feeders are the leaders,’” said Vetterkind. “So if feeder support comes out it could be a precursor for further weakness in the live cattle.”

Last week was a fairly storied week for outside market activity. In the general markets, it was the week after the Dow broke— and closed above—14,000. That seemed to set the stage for a lot of movement in the stock market last week with extreme greed driving the market, according to CNN Money’s entertaining emotional index. This stood in stark contrast to general consumer sentiment.

Word of potential rain in southern Brazil and Argentina in the near future likely impacted U.S. near-term corn futures, which shed just over 25 cents throughout the week. Additional grain-related attentions were focused on the Friday release of the most recent World Agricultural Supply and Demand Estimates report. See WLJ’s coverage of the report in next week’s issue.

An interesting bit of commentary on the current and potential future of the U.S. cattle world came out of CME’s “Daily Livestock Report” analysts Steve Meyer and Len Steiner. They, too, gave a bit of history, reflecting on how, following the 1972 banning of predator poison “1080,” already slowly declining U.S. sheep numbers began to plummet. The increased death rate of sheep and lambs by predators increased the costs of production and reduced the availability, which in turn served to make U.S. lamb and mutton less attractive to consumers and made the market more inviting to imports.

They shared this bit of market history—and drew comparisons between the then small-flock structure of the sheep industry and our current small cow herd situation—not because they foresee the same happening to U.S. beef, but to drive home the point that “Policy decisions MATTER.”

“The 1080 decision was a profound one for the sheep industry just as decisions on public lands usage, water rights, food safety, antibiotics and others will be important for the beef industry.”

Another thing they pointed out on the import side of things is how policies such as mandatory country of origin labeling (MCOOL) have impacted imports and the market in general. On the one hand, Canadian imports of fed and feeder cattle have declined significantly—32 percent and 50 percent, respectively—since 2008. The change is attributable in part to the strengthening of the Canadian dollar relative to the U.S. dollar, but the added cost burden MCOOL imposes has had a hand in it as well.

On the southern border, the opposite has proven true.

“MCOOL does not appear to have had as much impact because southern feeders and packers have been able to better segregate the cattle and product and labels including Mexico are not a big problem in markets with high proportions of Hispanic buyers,” said Meyer and Steiner.

Imports of feeder cattle from Mexico had more than doubled in the same time Canadian feeder imports were down by half. Aside from the aforementioned non-issue of MCOOL packaging notices among the large Hispanic U.S. population, the drought that is hitting Mexico as much as the south Plains has encouraged northern movement of Mexican feeder cattle. — WLJ

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