Cutout has topped, trends down

Jun 3, 2013

The cash markets were sluggish as packers are trying to hold onto their positive profit margins as cutout values have begun to move lower. By midweek, the asking prices were $126-128 live and $202-204 dressed, but packers were only bidding $122 live in the South Plains and $197 in Nebraska by Thursday morning. Troy Vetterkind of Vetterkind Cattle Brokerage had some predictions that morning.

“Packer margins are still positive, the beef market is holding up pretty good, and the futures market hasn’t capitulated yet. ‘Yet,’ being the key word because it’s been too easy for the packer to come in late in the week and slam the futures lower and get hedged feedlots to cough up cattle at attractive basis levels.”

He opined that, assuming that futures capitulation didn’t happen, the cash sales on Friday would be no worse than $124-125 in the South Plains and $198-200 in the Corn Belt. This would be steady to up $1 for fed and steady to down $2 for dressed compared with the prior week’s sales.

However, the futures markets didn’t play along with Vetterkind’s projections and the boards did a bit of a nosedive late in the morning. After having closed the prior evening at $121.37 for June and $120.40 for August—gains of 80 cents and $1.18, respectively, over the prior Friday’s close—Thursday morning saw the contracts lose almost all of their gains in the near-term contracts.

The gains throughout the first part of the week were attributed to moderate technical buying and short covering, but the sharp losses were blamed on the decline in the positive basis between cash trade and the futures contract. By Thursday’s market close, the June contract stood at $120.58, the same as its prior-Friday close, and the August contract had advanced all of 6 cents with $119.28.

With last week’s Memorial Day holiday, the production week was reduced. Industry estimates projected a production week no higher than 595,000 head, with some saying it could be as low as 575,000 head. There have been rumors of the potential of reduced full-week production weeks to come as packers try to hold onto that black ink as the cutout dips, but nothing has been confirmed.

Following the prior week’s record-setting product values, the Choice cutout moved lower. Compared to the record of $211.67 set on the prior Thursday, by last Thursday afternoon, Choice stood at $208.55, a decline of $3.12 from the record and down 27 cents from the prior Friday. Select lost more with a $1.35 decline by Thursday afternoon with $189.09.

Andrew Gottschalk of Hedgers Edge declared product value had topped and predicted the cutout should begin to trend lower with the first level of support back down at the $198-200 level.

The landscape of cut-specific prices began to shift last week and the preceding Memorial Day weekend. Previously superstar rib cuts received discounting along with round and ground formulations. Loin and chucks were mostly steady, though the weekend movement was called disappointing, particularly after the Memorial Day weekend as buyers didn’t want to take on too much inventory after the lackluster grilling holiday.

“Product sales at retail were mixed as a Joker was handed to the beef industry,” said Gottschalk. “Sales were highly influenced by weather. Mother Nature did the beef industry no favors as weather in the northeast and parts of the Midwest was not optimal for grilling.”

John D. Anderson, deputy chief economist, American Farm Bureau Federation, explained some of the other moving parts that are in play in the future of consumer demand for beef.

“Another factor that will be key to the future direct of wholesale beef prices is the performance of competing meat prices. Those have been very supportive of late.”

He explained that the prices for boneless, skinless chicken breasts have surged recently. Compared to roughly $1.50 per pound in mid-April, prices last week were around $2 per pound.

“This is the highest b/s breast price since about this same time of year in 2004, when prices briefly climbed into the mid-$2s. At that time, though, prices on other cuts were such that the 12-city broiler composite never exceeded 85 cents per pound.”

He pointed out the prior week’s national broiler composite, which succeeded the discontinued 12-city price series, was 113.53 cents per pound. This makes dark meats much higher priced compared to a year ago. Anderson also explained that the pork cutout has been surging as well, making for more expensive competing meats to go along with the high prices of beef at the meat counter.

Feeder cattle

Though regional as always, the cash feeder markets seemed to be lacking yearlings last week. Several sales reported volumes too light to establish a trend and some reports were withheld altogether on limited receipts. Where they did sell, medium to large class-1 (#1) steers were mixed, with prices heavily dependent upon quality.

California: The Turlock Livestock Auction Yard saw a light test of most classes of feeder cattle and was unable to quote a trend, but described the sales as lower due to pressure from the futures. The few #1 steers between 700-800 pounds sold for between $100-117.

Kansas: In the Winter Livestock Feeder Cattle Auction of Dodge City, there was a limited supply of #1 steers, but those between 800-900 pounds went for steady to $1 higher compared to the prior sale. Slightly lighter heifers went for $2-3 higher. The few animals in that class under those weights were steady but too few to call it a trend. Fifty head of 741-pound #1 steers went for an average of $136.

Missouri: In the many sales in Missouri, yearling feeders and calves were hard to come by with many sales calling receipts on those classes too light for a test. Some of those sales which did quote trends—steady to down $4 in most places with the exception of the Green City Livestock Auction which saw steers and heifers go for up $5—notably had no #1 steers over 600 pounds sell. Those sales which did have heavier steers to quote only sold animals in the lower end of the 700-pound range. In Green City, a handful of 705-pound #1 steers sold for $147.50 while in the Springfield Livestock Marketing Center, 26 head of 720-pound #1 steers went for $128.53. These two sales represented the extremes of what was a very limited list of example sales.

Montana: The Public Auction Yards in Billings saw another sale with volumes too light to establish a market trend. Slaughter cows were called steady to $2 lower and slaughter bulls were steady. There were no #1 steers over 700 pounds sold.

Nebraska: In Kearney’s Huss Platte Valley Auction, demand for feeder cattle was good. Steers and heifers went for $5 higher than the prior sale, and the buyers were active and enthused by the recent rainfall. The sale was mostly feeders with some pairs and baby calves. Over 100 head of 767-pound #1 steers sold for an average of $138.07.

New Mexico: In the Clovis Livestock Auction, receipts were light and volume made calling a trend difficult. That said, feeder steers were called steady to strong, while heifers were the opposite with steady to weak.

An undetailed “lot” of 724-pound #1 steers sold for an average of $134.50.

Oklahoma: In the El Reno sale, feeder steers sold $1-3 higher with the exception of cattle over 850 pounds, which were steady. Heifers were steady to up $2 and the supply of calves was limited but were said to have a steady undertone. One hundred and sixty-two head of 778-pound #1 steers sold for $133.66. At the same time, the Southern Oklahoma Livestock Auction in Ada saw a light test of both calves and yearling feeders, making a trend hard to establish.

A lower undertone was noted on the “very plain” quality of the offering. Slaughter cows were steady to $2 lower and slaughter bulls were $1-2 lower. A dozen #1 steers weighing 729 pounds sold for an average of $128.14.

The feeder futures were tagging along with last Thursday’s downward movement of the live futures with most of the contracts on the board showing losses over $1. Over the span of the week, however, the losses weren’t so drastic. The August feeder contract lost 25 cents with $144.30 and the September contract lost 10 cents with $146.58.

While it is usually the corn markets which warrant mention in this report, last week the wheat market had an interesting bit of movement. Thursday morning saw July wheat futures down 8 cents after Japan announced they were suspending imports of U.S. white wheat. This move came after an unapproved strain of genetically modified wheat was found on an Oregon farm. Read more about that issue in the story on page 9 of this week’s WLJ.

Cattle slaughter

The most recent livestock slaughter report showed the production of beef for April was up. For the month, cattle slaughter numbered at 2.729 million head, 6.2 percent higher than the previous year. Beef production, at 2.13 billion pounds, was up 7 percent compared to the previous year. It is important, however, to keep in mind this April had one additional weekday compared to April 2012. Despite that, output was still higher than last year when adjusted to compensate for the additional day. Year-todate beef production is running at 8.3 billion pounds, according to the report. This is statistically steady with the same time last year, but is several million pounds higher when one looks at the actual numbers.

The breakdown of which classes of cattle were slaughtered and in what numbers showed a slight shift away from heifer slaughter and towards cow slaughter. Year-to-date this year, steers represented 48.5 percent of the total population slaughtered—up 0.3 percent from the same time last year—and bulls stayed steady at 1.6 percent of the population. Heifers slaughtered dipped to 29.3 percent of the total population while the same time last year, that number was 30.2 percent. Cow slaughter jumped to 20.6 percent, compared to last year’s 19.9 percent.

Live and dressed weights in April are still up compared to last year, but—as Meyer and Steiner put it— the pace of growth in weights has slowed. According to the report, the average live weight was up 14 pounds from the previous year, at 1,295 pounds, and the average carcass weight in April was 844 pounds, 1.1 percent over a year ago. — WLJ