Cash trade slow, futures struggle

Jun 17, 2013

Last week saw donut-like activity in the cash fed market. Light trade occurred on Monday and Tuesday in Iowa at $193.50-195 dressed and $122-124 live. This was called clean-up trade from the previous week by Troy Vetterkind of Vetterkind Cattle Brokerage. Vetterkind also said that while the volume was limited and wasn’t a trend for the week, it did “sort of set the tone for a softer trade.”

With large showlists and packers reportedly being offered a lot of contract/formula cattle, they had the leverage in prices last week. Wednesday was dead and cash trade activity was dead on Thursday with analysts expecting a late-week trade. By Thursday afternoon, a little over 4,000 head had been confirmed sold, but distributed across the country at individual numbers too low for a proper market test. Analysts expected a Friday trade at $121-122 live in the South Plains and $193- 196 dressed in the Corn Belt.

Live cattle futures didn’t seem to know what to do with themselves last week, with near-term contracts trading gains for losses and vice versa throughout the week. While on one day they would post gains in the triple digits, the next they’d lose just as much. By Thursday afternoon, June and August live contracts had declined compared to the prior Friday’s close, with $119.75 (a loss of 37 cents) for June and $119.15 for August (a decline of 7 cents).

Vetterkind noted that a basis shift is usually seen during June, meaning “the June and August live cattle already have an additional $2-$3 break priced into Texas cash. But still have to respect the technical of the market, meaning that if we break down through the above mentioned contract lows we probably have an additional $2-$3 lower in the futures, which would take the August live down to $115-$116, a price level that should print a summer low in the market.”

Andrew Gottschalk of Hedgers Edge also saw a shift coming, but for farther-out contracts.

“A basis switch appears to be underway for deferred fed cattle. During the past seven years cash, basis W KS, averaged above August futures during July only one time. That year was 2010. During the previous seven July cash prices averaged $1.75 below the August futures. If a similar pattern develops this year the recent lows in August futures would be discounting a $116-$116.50 cash low during July. That level is consistent with our projected cash low at $116 for this year.”

Production last week was estimated to hit 645,000 head, just under the prior week’s 644,000 head. If realized, last week’s production rate would have been 16,000 head less than the same week the prior year, but still sufficient to keep the fed sector current, according to Gottschalk. There was a bit of a hiccup on Wednesday when JBS in Dumas, TX, was shut down due to an ammonia leak. Analysts, however, were confident the shortcoming would be made up on Saturday.

According to the Livestock Marketing Information Center’s Livestock Monitor, U.S. steer slaughter will be about 2.3 percent below a year ago while heifer slaughter will be down 4.5 percent. At the same time, cow slaughter is projected to be 1 percent above the first half of 2012.

“Overall, U.S. commercial beef production will be about 1.5 percent below 2012’s. In the second half of this year, declines in production compared to 2012’s levels are forecast to be much larger than in the first six months.”

At the moment, however, packers are still in the black and wanting to keep bringing in profits as long as possible. Expectations for production weeks in or above the 640,000 level persist going forward.

The direction of product values could play havoc with those plans, however. The Choice cutout has trended steadily downwards since its mid-May heights. Compared to the prior Friday close of $201.57 for Choice and $183.37 for Select, Choice lost 94 cents by Thursday afternoon with $200.63. On the other side, however, Select gained $1, seeing Thursday afternoon with $184.37.

“Product values will continue to trend lower to initial support at $198-$200,” opined Gottschalk. “Product values will succumb to significant selling pressure as we proceed through the balance of this month… Long term support this summer should be uncovered at the $188-$191 level.”

Steve Meyer and Len Steiner of CME’s Daily Livestock Report pointed out that even the now-declining Choice cutout value is being driven by the Asian export market and middle meats; specifically steaks.

“Will middle meats continue to carry the cutout? This has been the worry in the market since late April and it remains today.”

The question is one retailers and the industry keep trying to answer, but they are not the ones with the last word on the matter.

“Mother Nature has not treated the beef industry kindly during the best demand period of the year,” explained Gottschalk. “Cold and wet weather in the Midwest and the Eastern corridor has limited grilling.”

Gottschalk also pointed out that poultry has been the clear winner in the battle for consumer dollars this summer, and that the intensity of the competition between meats will only continue as the summer wears on.

“Post Father’s Day fill-in business may provide some temporary relief from the daily selling pressure on product values. If product moves well another round of fill-in business will develop. If not, cutout values will trend toward the summer lows basically non-stop.”

Feeder cattle

Sale reports were light last week as many sales across the country saw volumes too light to set a trend or simply no sales at all. In Missouri especially, attention was on crop activity, not buying cattle. But where they did sell, demand was called good despite widespread issues with range conditions.

Kansas: At the Winter Livestock Feeder Cattle Auction, feeder steers sold firm to $2 higher while feeder heifers were firm to $4 higher. Calves of both sexes were called steady to firm compared to the most recent comparable sale. Demand was reported as very good for all cattle despite the drought conditions and poor rangeland. Thirty-three #1 steers weighing an average of 729 pounds sold for $139.72.

Missouri: Many of Missouri’s usual plethora of sales either didn’t run or were so lightly attended that no reports were made. Many producers who might otherwise have been in the sales were busy capitalizing on haying activities as the state finally got a break of good weather. Of the few sales which reported receipts, feeder steers and heifers were generally steady to firm, with the Farmington Livestock Auction quoting them as steady to up $6. Slaughter cows were mostly steady with some instances of up $1-3, and slaughter bulls were steady to weak. Calves were sparse, but generally weak, with steer calves down $2-5 and heifer calves steady to down $2. There were very few sales reported of mid- 700-pound #1 steers, but they sold in the low- to mid- $130s.

Nebraska: At the Huss Platte Valley Auction in Kearny, steers sold steady to $5 higher and heifers sold $2-4 higher. Demand was said to be good to very good with a lot of buyers in the seats for the sale. A large supply of slaughter cows and bulls was available, though no quote was made on their relative prices. A little over two dozen #1 steers weighing an average of 775 pounds sold for $138.83.

New Mexico: In Clovis’ Livestock Auction, feeder steers were up $3. Feeder heifers and both sexes of calves sold steady. A package of thin 715-pound #1 steers sold for $136.

Oklahoma: At the Union Livestock Market of McAlester, yearling feeders were hard to come by, but the few steers that sold were up $1- 2 while heifers were called steady to down $2. Calves were mostly steady with the exception of some offerings of attractive steer calves between 500-600 pounds, which sold up $5-10. Slaughter cows and bulls were lower, with cows down $2-4, and bulls down $3. Mid-700s #1 steers sold for between $128.54-130.82.

There are a lot of “ifs” involved with cattle feeding at the moment, most of them hinging on the fickle nature of the weather.

“This summer, if national pasture and range conditions are better than during last year’s drought and if Midwest crop prospects are improved, yearling and calf prices will stabilize and could increase compared to those posted recently,” projected Meyer and Steiner.

Vetterkind described what might be hope-fueled optimism in feeders. “Demand remains good for feeder cattle despite current losses in feedlot closeouts, but the bigger factor remains the tightness in current feeder supply that is dictating the recent gains in the cash.”

Feeder futures fared much better than did live cattle futures. Both of the near-term contracts gained almost $2 over the course of the week compared to their Friday close. By Thursday afternoon, the August feeder contract had settled at $145.48 and the September feeder contract had moved up to $147.70.

“Even though very little buying support was seen through the early part of the session, traders have quickly jumped back into the market,” said DTN’s Rick Kment. “The surge higher in both the live cattle futures and lean hog futures market is sparking interest across the entire feeder cattle market.” — WLJ