Seasonal lows likely past for live futures

Jun 28, 2013
by WLJ

The cash fed trade was slow to develop last week as packers and cattle feeders were at a stalemate over prices. Packers, still boasting positive margins in the $60-75 per head area, wanted to hold out for cheaper cattle. But cattle feeders, especially following midweek rallies in both futures markets and strength in the cash feeder market, were holding the line on asking prices as packers were buying for this week’s shortened production week.

Bids of $117 in the South Plains and minor regional trade developed by Tuesday, but the bids were passed over and the sales were too light to set even a suggestion of the week’s trade. Analysts expected trade to be mostly put off to Friday with packers ceding ground in the leverage battle to cattle feeders’ asking prices of $121-122 live and $195-196 dressed. If realized, such prices would be $1-2 higher than the prior week’s trade. By Thursday afternoon, barely 4,000 head had been confirmed sold for the entire week, solidifying projections of end-of-week trade.

Despite last week’s potential strength in the cash fed markets, analysts expected prices to decline soon.

“During the past seven years, the third quarter low was scored by the week ending August 2,” reminded Andrew Gottschalk of Hedgers Edge.

“Fourth quarter prices have a strong seasonal tendency to average above third quarter average prices. The few years which failed this pattern were associated with recessions. On that front, the US economy continues to chug along. The greatest risk to the domestic economy is an implosion in China or the developing market economies.”

Editor’s note: Though it is not within the purview of this report to cover the intense relevance of China’s economic goings-on to the U.S. economy, Gottschalk speaks passionately and at length about the intricacies of the Chinese economy and what its movements can mean to Americans. Such things as the extremely leveraged nature of its economy, the fact it’s borrowed against its own future growth potential, and the extensive nature of its “Shadow Banking” sector, among many others, are all important facets to follow.

But, back to cattle, Gottschalk continued:

“Although cash prices are expected to temporarily slip below $120 during the next thirty days, futures have likely scored their respective contract lows.”

Compared with the prior Friday closes of $121.25 for June live cattle, and $121.60 for the August contract, near-term live cattle futures were mixed with the soon-toexpire June contract posting slight losses towards the end of trade with $120.90 (35 cent loss) while August gained $1.13 with $122.73.

“The futures market hasn’t given much price direction this week, although the futures have managed to hold on to the sharp gains from late last week,” said Troy Vetterkind of Vetterkind Cattle Brokerage on Wednesday last week. He attributed the minor rally seen Wednesday on short covering and technical buying.

“We saw another round of good technical closes yesterday with August live settling above $122 and October above $125, which keeps the door open for a trade up to $124 in August and $127 in October, which would be a 38 percent retracement of the entire Dec-May break in the market.”

Cutout values finally broke through the closest support of $198 for Choice last week. Compared to its prior Friday close of $199.39, Thursday afternoon saw it at $197.38. Gottschalk reiterated that the next level of support for Choice stands at $188-191, which he opined would be the summer lows.

Select, on the other hand, has been gaining. Compared to the prior Friday’s close of $186.22, by Thursday afternoon, it had moved to $187.62, a gain of $1.40 In a reversal of a situation which seems so recent, ribs, chucks, end meats and ground formulations were carrying the cutout value, while loins were trying to drag it down.

“The loin is the biggest drag on the choice cutout right now as seasonal disinterest for steak items is forcing packers to offer discounts on those cuts,” reported Vetterkind. “The rest of the complex is actually acting pretty good as there is some decent demand for end meats and strong demand for ground beef ahead of the 4th of July. In certain instances packer supplies are said to be short of buyer inquiry on rounds and ground beef.”

Exports, too, have been a source of demand on chucks and end meats. Most recent beef export numbers showed 15,200 metric tons of beef going out, with most of it going to Japan, Hong Kong, Canada, Mexico and South Korea. This is down 4 percent from the prior week, but up 7 percent from the fourweek average.

Feeder cattle

Cows stole the show in last week’s feeder sales. With the impending July 4 holiday—a very burger-heavy grilling holiday—and word of declining imports of grinding beef from Oceania, demand for slaughter cows for grinding beef is high. There were light reports for medium and large 1 yearling steers, but where they existed, they were mostly up.

California: At the Turlock Livestock Auction Yard, demand and prices reportedly improved for all classes of cattle. Number 1 steers weighing between 700-800 pounds sold for between $108-129.50. In the Escalon Livestock Market, #1 steers remained steady with recent sales, with steers between 600-800 pounds selling for between $90-118. Holstein steers in a similar weight range sold for $65-80.

Colorado: At the La Junta Livestock Commission Company Inc., the sale was mostly slaughter cows and bulls, as well as cow/calf pairs. Demand was called good with slaughter cows selling for $5-8 higher than the prior sale. Bulls were up $1. High-dressing Breaker and Boner cows sold for $86- 88 and $87-91, respectively.

Kansas: The Winter Livestock Feeder Cattle Auction of Dodge City saw an extremely limited supply of feeder steers and heifers. Despite this, the sale called them steady to firm. A similar trend was noted in calves, but there were too few to establish a market test. Thirty-two head of 789-pound #1 steers sold for an average of $140.90.

Missouri: In Missouri’s many sales, slaughter cows took center stage. Almost no one mentioned feeder calves and few sales had information on yearling feeders, but slaughter cow trends were quoted almost everywhere. At worst, slaughter cows were going for steady money compared to the previous sales, but most were up between $2-7, with most being in the up $4-5 area. Slaughter bulls were at worst down $1, but that was only reported at one sale and most others had them priced at steady to up $3 with one sale quoting them as high as up $5-7. The few yearling feeders that were quoted were steady at worst. Steers were quoted as going for up $2-5 with preference going for heavier animals, and heifers were up $3-6 with instances of up $7-9 for heavy heifers. For #1 steers in the mid- 700s, the Missouri sales were all over the map in terms of prices. At one extreme, the Vienna South Central Regional Stockyards sold seven head of 780-pounds #1 steers for an average of $124, while at the other extreme, the Green City Livestock Auction sold 93 head of 735-pound #1 steers for $150.38.

Montana: In Billings’ Public Auction Yards, very few classes of cattle were numerous enough to set a market trend; feeders made up only 5 percent of the offering, and then they were all heifers. Slaughter cows were called steady to firm while slaughter bulls were steady. Demand was called moderate to good.

Oklahoma: At the Union Livestock Market of McAlester, light steer calves were up $6-9, mid-weights were $3-7 lower, and steer calves over 650 pounds were steady to $8 higher. Heifers were steady to up $1. Slaughter cows were up $3-4 and slaughter bulls were up $3. Packer demand was very good for slaughter cows specifically. A batch of 42 729-pound #1 steers sold for an average of $133.73. At the Woodward Livestock Market, slaughter cows were up $5-7 and slaughter bulls were up $3-4. Packer demand was said to be very good with the July 4 holiday being a likely motivating factor. High-dressing Breaker and Boner cows were selling for $89 and $90-95, respectively.

Nebraska: At the Bassett Livestock Auction, no market trend was given due to lack of comparison with the last sale. Demand was said to be good on yearlings and weaned calves. Sixty-two percent of the offering was made up of steers. Over 100 #1 steers averaging 764 pounds sold for an average of $149.85.

Wyoming: In Riverton’s Livestock Auction, there was no comparison to be had on feeder cattle or calves. Slaughter cows were called mostly steady but with instances of up $2-6 depending upon quality. Slaughter bulls were steady to up $2 with instances of up $9 on individual bulls. High-dressing Breaker and Boner cows went for $70.50-75 and $73- 82, respectively.

Early last week, Gottschalk commented on the near future of the feeder situation.

“By this fall, yearling supplies outside feed yards should post a Y/Y decline limiting placements against the 2014 spring market. Following many months of average fed cattle losses exceeding $100 per head the fed sector should become profitable during the fourth quarter.”

Vetterkind also predicted a strengthening in feeders as time wears on, as well as some trading advice.

“Tight supplies of cattle coming to market is keeping the market fully steady to higher and this is expected to be the case for the next several weeks, despite expected weakness in the cash fed cattle trade going into July. Breakeven projections show 700 weight steers can be hedged at breakeven if not a small profit going out into the fourth quarter and this is helping to support the cash feeder trade as well.”

Last week, feeder futures saw a nice rally to the tune of about $2.50 for both the near-term contracts. Compared to the prior Friday closes of $146.92 for August, and $149.15 for September, Thursday afternoon saw those contracts at $149.35 and $151.53, respectively.

Vetterkind cautioned that the rally, which occurred mostly on Wednesday and continued into Thursday morning, could stall at $150, but that “good buying” could be found at $146 for August. Gottschalk, too, cautioned against too much excitement over the rally, calling the feeder futures overbought.

Cattle slaughter

The most recent Livestock Slaughter report showed overall commercial red meat production in May was 4.15 billion pounds, a 1 percent decrease compared to May 2012. Beef production was 2.23 billion pounds, slightly lower than last year.

Total cattle slaughter in May was 2.86 million (2.82 million under federal inspection) which was down slightly from last year. The breakdown across the cattle classes saw some relevant shifts, with steers making up 51.5 percent of May’s federallyinspected cattle slaughter, up from the prior month’s 48.8 percent, but down from last year’s 52.5. Heifers accounted for 27 percent of the slaughter, down 2 percent from last month, and down 0.7 percent from the same time last year.

Bulls’ proportion of the cattle slaughter remained steady with last month and last year at 1.8 percent. Cow slaughter, on the other hand, saw some fluctuations. Total cow slaughter in May made up 19.7 percent of the total, and of that, 8.8 percent were dairy cows and 10.9 percent were “other cows” which mostly refers to beef cows. Comparatively, April’s cow slaughter—20.4 percent of total—saw an almost perfectly even break between dairy cows and “other cows.” On the other hand, however, the May 2012 dairy cow numbers were similar to this May’s, with total cow slaughter representing 18.1 percent and dairy cow slaughter representing 8.9 percent. That leaves “other cow” slaughter in May 2012 at 9.3 percent, making this May larger by over a point and a half.

Analysts have long commented that this year is shaping up to be one of disappointed herd rebuilding efforts as continued poor range conditions are forcing ranchers to not only turn some retained heifers over to feeders, but culling their cowherd.

“Feeder cattle supplies will continue to shrink as cow slaughter has remained large,” commented the North American Risk Management Service in its reaction to the report. “Range conditions have improved in many areas, but it will be quite some time before cow herds and resulting feeder cattle supplies are rebuilt.” — WLJ