Summer lows still to come?

Markets
Jun 24, 2013

Light cash trade developed sporadically throughout last week with Iowa and Nebraska selling several hundred head on Tuesday and Wednesday at $120-122 live and $190-192 dressed with a few at $194 dressed going to a regional packer in Nebraska. Analysts called the volumes too light to set the trend for the week, but saw them as indicative of a cash trade by the end of the week steady or $1 lower than the prior week’s trade.

Troy Vetterkind of Vetterkind Cattle Brokerage suggested the cash market would continue lower in the near future.

“I don’t think we have seen the cash lows for the summer yet and likely takes place somewhere around $116-$118 by the middle of July,” he said.

Andrew Gottschalk of Hedgers Edge agreed that prices will continue down, noting that the early-week trade, if ultimately representative of the entire week, was a violation of the existing support.

“The next level of key support is at $118.00 followed by $116.00. The latter is our projected low for the year given our annual average price estimate. A cash level of $116.00 would fully restore retail beef margins and lead to aggressive beef features.”

Live cattle futures had a lot of sideways movement as has been the case for the last few weeks. But last week, the sideways dance had some advancing steps, too: three steps forward, two steps back, repeat. After a week of trading gains for slightly lower losses, the near-term contracts ultimately gained some by Thursday afternoon at $119.90 (up 90 cents) for June and $119.85 (up $1.53) for August compared to their prior Friday closes.

Vetterkind attributed most of the gains made in the futures on Monday and then again on Wednesday to short covering, hedge lifting, and support from strong rallies in cash hogs and hog futures. He did, however, say one of Monday’s rallies he called “algorithm induced” and speculated that a basis adjustment was in play. Gottschalk also spoke of basis movement.

“Cattle futures remain resilient as a seasonal basis switch appears to be underway.”

Vetterkind had some advice for how to trade the current futures markets:

“If wanting to trade these ranges in the cattle market, might want to consider using options, especially in the October live contract due to extremely low option volatility of 8-9 percent. Buy the calls on breaks and buy the puts on rallies, and at least you know where your risk is at and you don’t have to put up with these stupid algo moves in the futures. If anything the volatility on the live cattle options is so low, even if the market moves against you for a day or two the options are going to hold their value.”

Last week saw the industry expecting a 645,000-head production week, almost precisely in line with the prior week’s 644,000-head processed. However, later in the week, that estimate was upped to 655,000 head as strong packer margins— which has been projected around $60 a head and been positive for several weeks now—motivate them to capitalize on their profits.

“Packers still have decent margins to work with and are going to be willing buyers of live inventory and the positive basis is going to mean feedlots are going to be willing sellers,” said Vetterkind. Of the late-week increase in production projections, he suggested it might serve to keep the market steady on the near term.

Product values continued to trend downward throughout the week for Choice, and upwards for Select. Compared to the cutout’s prior- Friday close of $199.53 for Choice and $183.79 for Select, Thursday afternoon saw Choice lose 17 cents at $199.36 and Select gain $2.12 with $185.88.

“The boxed beef market is going to continue moving lower as the market deals with increased production in the coming weeks and softer demand past the early summer holidays,” said Vetterkind. “This means near term rallies in the cash trade are going to be limited if they come at all.”

Gottschalk commented on the likely levels of support for Choice the market could see soon.

“Choice product has attained our initial objective of $198-$200. We expect the next level of support to be at $188-$191.”

The movement of beef over last week started off decent for the weekend, sluggish at the beginning of the week, then picked up later on. While the earlier show-stealers of middle meats and loins left the limelight and end meats and chucks continued to disappoint, interest in ground beef picked up as the market nears the 4th of July, which is decidedly a burger holiday when it comes to the grill.

“The star of the complex right now is the ground beef market as there is strong demand for ground product to deliver ahead of the 4th of July,” said Vetterkind. “This is keeping decent support in the boneless processing beef complex as well. Might see cutouts stabilize at current price levels for a couple of days as July 4th business gets completed.”

The demand for ground beef and boneless beef has coincided nicely with a cow slaughter-heavy period. As pointed out by Steve Meyer and Len Steiner of CME’s Daily Livestock Review, 2013 has seen year-to-year increases in cow slaughter— up 17 percent in the first quarter compared to the same time in 2012. They called this the reality of herd expansion plans frustrated by another year of drought-parched pastures.

Gottschalk agreed with this position, saying weekly cow slaughter levels confirm this is another year of herd liquidation for many western producers.

“Feed supplies remain critically short in other areas with prices too high to encourage supplemental feeding. Restocking feed supplies is primary objective before any herd rebuilding can begin. If continued timely rains are not received, subsoil conditions in many regions are insufficient to sustain grazing for an extended period.”

According to the most recent Crop Progress report— which tracks range condition as well as crop condition—23 percent of the ranges in the continental U.S. are poor or very poor, 25 percent are fair, and 52 percent are good or excellent.

However, if one narrows the scope to just western states (all 17 states west of Texas’ eastern boarder), the breakdown looks a bit bleaker with 39 percent rates as poor or very poor, 28 percent fair, and 33 percent good or very good.

At the state-specific level, the situation looks even worse. Colorado, for instance, has 59 percent of its pastures rated at poor or very poor, and none as excellent. New Mexico is in dire straits with 93 percent of its range at poor or very poor, and the remaining 7 percent only at fair.

Feeder cattle

Demand for slaughter cows seems to be up across the country, which is good since there is a ready supply of cull cows. Grass-worthy calves were also a hot ticket item for those areas which have seen unexpected rains. How long that demand— and rain-fueled hope of greener pastures—will last has yet to be seen. Medium and large 1 (#1) steers were mixed but mostly up.

Colorado: At the La Junta Livestock Commission Company Inc., steers and heifers were a light test, but called steady with a narrow exception for 600-640 pound heifers which sold up $2. Slaughter cows were $2-3 higher and slaughter bulls were steady. Demand was called good and the majority of the sale consisted of cows, bulls and pairs.

Kansas: In the Winter Livestock Feeder Cattle Auction of Dodge City, yearling steers and heifers sold $3-5 higher with both sexes of calves too few for a market test. Well over 300 head of mid-700s #1 steers sold between $139.41-144.50, with higher prices going to lighter or thin-fleshed animals. Over at the Pratt Livestock Feeder Cattle Auction, midto heavyweight feeder steers were steady to firm with the prior sale’s advance. The heaviest steers (over 1,000 pounds) sold for as much as $6 higher. Midweight feeder heifers were steady to $3 up. Feeders under 650 pounds were not well tested. Over two dozen 748-pound #1 steers sold for $141.60.

Missouri: The sales of Missouri were mixed in terms of the severity of discounting on feeders, but almost unanimously, lighter animals (under 550 pounds) were down while heavier feeders were steady to up. At the most extreme, Ozarks Regional saw light steers selling for $8-10 down. Steady to higher prices for heavier feeders went as high as up $3-4, but were mostly around $2. Slaughter cows and bulls were mostly steady to up, with Ozarks Regional seeing both go for $3-5 higher money. Number 1 steers sold between $129.83- 144.06, but most were centralized in the low $130s.

New Mexico: At the Clovis Livestock Auction, feeder steers and heifers sold down $1, but calves were $2-3. Slaughter cows and bulls, which made up almost a quarter of the offering, were up $1-3. The sale noted that recent rains have limited receipts but stoked the demand for grass-worthy calves. Three 720-pound #1 steers sold for $137.67.

Oklahoma: The Sooner State saw a number of active markets last week. At the Woodward Livestock Market, slaughter cows and bulls sold $2-3 higher, with high-dressing Breakers and Boners going for $82 and $83.50-86, respectively. At the Union Livestock Market of McAlester, steer calves sold up $1-6 with mid- to heavy-weight heifer calves going for $3-4 higher. Slaughter cows were $1-4 higher and slaughter bulls split the difference with up $2. Yearling steers were not overly plentiful, but 19 head of 766-pound #1 steers sold for $128.97. And in Ada’s Southern Oklahoma Livestock Auction, slaughter bulls sold for $1-2 higher and most other classes were too limited for a comparison, though calves were called uneven with instances of sharply higher on weaned calves. Mid-700s #1 steers were decidedly trading in the $135 range.

“Many cattle being marketed right now have breakevens in the mid-lower $130s,” commented Vetterkind. “If these cattle have no risk management in place they are losing anywhere between $100-$200 per head. Yet the cash feeder market is trading higher as cattle can be hedged at a small profit or breakeven in forward timeslots.”

Feeder futures posted modest gains over the week last week. Compared to the prior Friday’s close of $143.40 for the August contract and $146.22 for September, August gained 65 cents with $144.05 and September gained 38 cents with $146.60. — WLJ

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