Markets move lower on seasonal demand

News
Feb 15, 2013
by WLJ

Cattle markets were much softer last week as packers showed little interest in increasing slaughter in the wake of softer cutout values; the packer margin index shows packers losing $69.25 per head on an average buy in at $124.85. Therefore, packers were successful at moving the market lower by $2. Most live trade was at $123 and dressed trade was between $198 and $200.

Cattle futures were mostly lower last week as a combination of weak wholesale beef prices and lower grain values pressured both live and feeder contracts. Nearby feeder cattle futures declined as much as 155 points on Tuesday as corn futures continued to drift and closed below $7 per bushel.

Many of the large index funds and cash management firms have moved away from speculating in commodities recently and have moved to the short side of the market. This has put tremendous pressure on futures contacts, leaving the cash market to pave the way for real price discovery. The February live cattle contract was at $125.50 Thursday and the oncelofty April contract was down to $129.22. Open interest is at a very low point for all cattle contracts.

Packers have moved production levels even lower to try and boost the beef cutout values. Slaughter was expected to close out at 590,000 head last week, which will not clear cattle feeders’ show lists.

Beef demand is a major issue at this point. Cutout values were at $183.68 for Choice and $179.32 for the Select products and trade volume was slow. The Choice/Select spread was at $4.36 last Thursday.

“Buyers are reluctant to take on any extra product until they see some sort of uptick in demand from consumers and that isn’t happening, especially with the start of lent [last Wednesday]. If packers continue to keep production levels curtailed perhaps the boxed beef market can get cleaned up in a couple weeks. Time will tell how this plays out,” said Troy Vetterkind with Vetterkind Cattle Brokerage.

Andy Gottschalk at Hedgersedge added, “Negative packer margins continue to restrict any interest in adding hours—quite the opposite. We expect slowdowns to be maintained this week. Will demand sustain the production at the 600,000 head per week level? The disruptive weather in the eastern seaboard consuming areas will again displace some demand. Following the recent wholesale decline, cutout values have reached a level that should invigorate retail interest. That said, it has not happened yet, and the February normally favors pork as opposed to beef. Maintaining “total beef demand” even at 2011 levels, which is below the level achieved during 2012, will prove to be a challenge. Year-to-date cattle slaughter was down 2.9 percent versus the prior year, while production was down 2.2 percent.

Corn demand continues to be a hot topic and the market, for the moment, is focusing on what it can see, weak export sales and lower ethanol use. There is plenty of speculation about the pace of feed use but still lots of unknowns prevail until the March 1 grain stocks report is issued.

Crops in South America have so far avoided any major weather events and this also has been bearish for corn. And then there is the rampant speculation that with grain yields potentially returning to trend line, weather permitting, corn supplies are anticipated to balloon next year, requiring significantly lower prices to clear the market.

Feeders

Feeder cattle markets were also softer with the heavy cattle seeing most of the pressure. Cattle over 800 lbs. were down $3-5 in many of the major markets. Feeder cattle futures have also been in a nose dive with the nearby March contract at $141.27 last Thursday and the August contract down to $152.80, off $13.20 from its contract high of $164 Jan. 7.

There remains significant unrest in the feeder cattle market surrounding not only potential long term beef demand, but feed availability over the next couple years if dry weather patterns continue.

“The reported CME feeder cattle index for 2.12.13 was $143.54 a loss of $.42. Cash feeder cattle are in free fall like the futures market with most sales [Wednesday] quoting their respective feeder offerings $3-$6 lower. Until we see some sort of stability in the futures market, feeders will continue lower [this] week. We are approaching some price counts in the futures markets that could provide at least some near term support, but whether it holds or not is yet to be seen. Slaughter cow markets are feeling pressure from the other cattle markets as well,” said Vetterkind.

Compared to the previous week, feeder cattle immediately bound for feedlots sold weak to $3 lower with the full decline on weights over 800 lbs., according to USDA reports. Middle-weight calves and feeders weighing 500-700 lbs. with an average to fleshy condition that forces them into some kind of confined feeding facility sold largely steady.

Stocker cattle and all calves weighing under 500 lbs. traded firm to $5 higher, especially throughout the southeastern calf markets where orders were starting to pour in from the west as unseasonably warm temperatures and spots of moisture in drought areas have grass grazers thinking spring.

The previous week’s cash feeder market rally did not carry into this week as cattle feeders are simply punch drunk from continued losses on their finished cattle closeouts. Cattle performance has been outstanding for two years now and weight gains are well above the historical averages, but feed costs have eliminated any chance for profits.

Gottschalk said that “losses in the feeding industry continue to have buyers holding onto both their heads and wallets. Calves over 550lbs generally traded steady. Calves and stockers under 550lbs traded steady to $5.00 higher, as warmer temperatures and some rain in the West had buyers eyeing Spring supplies. January placements into feedlots are estimated at 4% or above the prior year. Until spring grass in confirmed and available, supplemental feeding supplies and costs are too high to carry these cattle for long. Seasonally, feeder cattle should be entering a period of seasonal weakness. This weakness generally pervades the March period.”

At the Superior Livestock Auction on Feb. 8, a set of preconditioned English exotic-cross steer calves from Nevada, MO, weighing 435 lbs. for February/March delivery sold at $206. And another set of lightweight Angus cross steers weighing 475 lbs. from Chadron, NE, sold for $191 for February/ March delivery. Some yearling, 685 lb. Angus cross steers from Logan, IA, sold for $154 for March delivery. From the north, a set of Angus/Balancer cross steers from St. Francis, KS, sold for $153.50 for February delivery. There was also one set of Angus cross steers weighing 925 lbs. for August delivery that sold for $147 in KS.

At the auction market activity in Kearney, NE, compared to the previous week, steers and heifers under 500 lbs. sold steady. Steers and heifers over 500 lbs. sold $2-6 lower with the most decline late in the week. Demand was moderate to good with buyers being a little more selective on kind and flesh this week. Very good demand was noted on several lots of reputation replacement females sold at various auctions. Supply included near 57 percent steers with 68 percent of the total offerings over 600 lbs.

In Oklahoma City, OK, feeder steers were $4-6 lower last Wednesday. Feeder heifers were $3-5 lower. Stocker cattle and calves were lightly tested and steady to $2 lower. Demand was moderate for feeder cattle and moderate to good for lighter weight cattle suitable for grazing. Quality was average. Cattle were in medium to fleshy conditions.

Lighter cattle numbers were no longer able to hold the record market levels. Overhead costs remained high, pushing breakevens lower. This week’s supply included 82 percent over 600 lbs. with 35 percent heifers.

In Amarillo, TX, compared to the previous week, limited feeder steers and heifers were weak to $2 lower. Steer and heifer calves were mostly steady. Trade activity was fairly active on moderate to good demand, especially on conditioned calves that were available in the offering. Slaughter cows sold $2-4 higher and slaughter bulls $1-2 higher. Slaughter cows and bulls made up 4 percent, 2 percent replacements and 94 percent feeders. Feeder supply included 66 percent steers and bulls, 34 percent heifers. Approximately 67 percent of the run weighed over 600 lbs.

In Washington, compared to the previous week, stocker steers and heifers less than 700 lbs. were steady to $8 higher. Feeder cattle over 700 lbs. weak to $4 lower. Slaughter cows were approximately 57 percent of the supply; slaughter bulls 5 percent, and feeder’s 38 percent of the supply. The feeder supply included 54 percent steers and 46 percent heifers. Near 71 percent of the run weighed over 600 lbs. — WLJ

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