Record product values, contract lows

May 13, 2013

The cash fed trade developed as a slow but steady trickle last week with reportable sales starting as early as Tuesday. Cattle sold for $126-127 live and $202-204 dressed, decreases of as much as $5-6 for both depending upon what part of cattle country one looked at. The decline was not entirely unexpected, but still not welcomed.

“Packers talking about having plenty of inventory around them and a deeply discounted futures market were reasons for the lower fed cattle trade [last] week and this is likely going to be the case [this] week as well,” opined Troy Vetterkind of Vetterkind Cattle Brokerage of the cash fed weakness.

“It appears as though the cash fed cattle market has made its highs for the spring and would look for the market to trend lower into the upper teens to lower twenties in the coming weeks.”

Near-term live cattle futures suffered from losses last week on the expectation of declining product values—many industry stakeholders feel the cutout has topped—and the potential for a weak grilling season brought on by troubled weather and hard-to swallow beef prices for the consumer.

Over the course of the week, all three of the close-up contracts lost over $1.50. By Thursday afternoon, the June contract had lost $1.57 with $120.25, August had lost $1.64 with $120.33, and the October contract had lost $1.92 with $123.38. Analysts however expect the summer lows are yet to be realized.

“June/August live cattle managed to hold support at $120 and can still rally off that point for a minute,” reported Vetterkind on Thursday. “But bottom line, $120 very likely comes out in coming sessions and we make another leg down to the $116-$118 price level before we price a summer low in the cash fed cattle market. Resistance will be strong in June/August live cattle now at $122.”

Confidence was another issue weighing on the futures markets. According to Steve Meyer and Len Steiner of CME’s Daily Livestock Report:

“At this point, market participants continue to show a profound lack of confidence in the beef market for later in the year and in 2014, the flip side of where they were only six months ago (remember $138 April cattle back in December).”

The highlight of last week was the realization of record high cutout values. By Thursday afternoon, Choice cutout had reached $205.49. This is over 8 percent above what the cutout prices were the same week the prior year. Select too was up, posting $191.03 by Thursday afternoon.

“The big gains in the choice cutout have for the most part been driven by middle meats,” explained Meyer and Steiner. They pointed to the then-upcoming Mother’s Day weekend, and the upcoming Memorial Day weekend as leaders in this middle-meat push.

“Retailers and foodservice operators have increased their features of high quality beef cuts. The choice rib cutout currently is running 12.2 percent above year ago levels while the loin cutout is up 11.9 percent from a year ago.”

Chuck and end meats have seen some year-to-year increases too, though far more modest than the middle meats. Export demand for these and other less domestically popular cuts has seen a minor hand in the overall cutout value rally.

The rise in middle-meat values and overall product values have helped packers claw their way back into the black after so many weeks drowning in a sea of red. Most recent estimates place packers as making about $10 profit per head.

Packers are increasing production in an effort to not only meet forward sales and the anticipation of the eventual uptick in consumer beef demand, but to capitalize on their profits. The prior week was confirmed at 624,000 head and last week was estimated to be a 625,000-630,000 head week.

How long these profits will last is anyone’s guess however, as expectations of a decreasing cutout and the potential for a less-than-stellar summer demand period looms.

“Product values are topping at current levels,” said Andrew Gottschalk on Wednesday, when Choice was in the upper $204s. “A temporary price decline in the beef cutout should be anticipated. We are not ruling out another push to $206 if product moves well.”

He called product movement in the immediate future the determining factor in “any future recovery in product values.”

Weather continues to be a factor hampering usual seasonal beef demand. While weather is expected to improve this week and moving forward, both Mother Nature and the sentiments of consumers can be fickle mistresses.

Feeder cattle

“Feeder cattle are at the mercy of fed cattle,” said Gottschalk in not uncertain terms late last week. “Fed cattle prices need to recover to provide an incentive for feedlots to become more aggressive on replacement cattle.”

Vetterkind echoed this sentiment, also predicting more of the same going forward.

“Slumping futures and weakness in the cash fed cattle market has the feeder market on the defensive this week. As in the fed cattle market we are likely going to see more of the same next week.”

The cash feeder cattle market was mixed last week with availability, prices, and demand varying across the country. Availability of medium and large 1 class (#1) feeder steers was mixed with most packages being small, but even the small offerings were more numerously quoted last week than in prior weeks.

California: At the Turlock Livestock Auction, there was a light test on feeder cattle following the sale yard’s larger specialty feeder sale the prior week. Despite that, #1 steers between 700-800 pounds sold for between $118-120. At the Escalon Livestock Market, #1 steers between 600- 800 pounds were steady with their prior week levels of $90-118. Holstein steers over 600 pounds also remained steady at $70-85.

Colorado: La Junta’s Livestock Commission Company Inc. saw no comparable sales with its prior sale due to a light seasonal run of calves and feeders at only 20 percent of the offering. Slaughter cows and bulls were called steady. High-dressing Breaker and Boner cows sold for $75-78.

Iowa: At the Feeder Cattle Auction of Bloomfield, feeder steers were mostly $2-4 lower with the exceptions of lightweights which were down $10-15. Most heifers were down $2-5. Trade was called active on moderate demand. Thirtytwo head of 770-pound #1 steers sold for $139.20.

Kansas: The Winter Livestock Feeder Cattle Auction of Dodge City saw mid- to heavyweight steers sell down $6-9 while similarly-weighted heifers sold at $1-5 lower. Lighter steers and heifers were noted as weak, but the supply was too low for a proper test. Trade was called slow as buyers were very conservative on their purchases. A package of 275 head of 771-pound #1 steers sold for $130.79.

Nevada: At the Fallon Livestock Exchange, feeder cattle were called weak despite the active demand.

Dry conditions in the area have limited willingness to pay for cattle. #1 feeder steers between 700-800 pounds sold for $108-116.

Oklahoma: At the Union Livestock Market in McAlester, light steer calves sold for $3-6 higher while heavier calves (over 450 pounds) sold down $4-6. Heifer calves of all types sold down $2-5. Slaughter cows were called steady to up $3 while slaughter bulls were steady. There were very few offerings of mid-700s #1 steers, but the few that sold at the extreme ends of that weight range went for $119.02- 124.15 favoring the lighter animals. In the El Reno auction, feeder steers were down $3-6 with the sharpest discounting going for heavyweights. Heifers were down $2-4. Calves were too few for a proper market test. Just under 200 head of 762-pound #1 steers went for $132.03

Wyoming: At the Torrington Livestock Commission Co. Feeder steers over 600 pounds were called steady to up $3 while similarly weighted heifers were steady to up $4. Lighter feeder animals were too lightly tested for a comparison. Over 100 head of #1 steers weighing 765 pounds sold for $142.18.

Like fed cattle futures, feeder cattle futures took a plunge last week even as product values hit record highs. Over the course of the week—from the prior Friday’s close to late last Thursday afternoon—the May feeder contract lost $3.22 with $135.55. The other near-term contract, August, declined as well, but not nearly to the same extent. Over the week, the August contract shed $1.72 with $145.78 by Thursday afternoon.

Vetterkind was heartened by the fact August contracts were still managing to hold triple bottom support of $145 as of Thursday afternoon, but said he wouldn’t be surprised if that eventually comes out as well.

“Resistance will be strong now in August feeders at $148,” he said. — WLJ