Cutout remains surprisingly high

Markets
Jul 5, 2013

Last week’s short trade week saw surprisingly sluggish buying behavior from packers. Because of the July 4 holiday, markets—cash and futures alike—closed early on Wednesday and were closed Thursday, leaving only Monday through Wednesday and some of Friday for trading cattle. Additionally, there was talk that packers had fewer contract/formula cattle around them, which should have spurred greater activity earlier on, but by Wednesday, little had developed. Sales of $119 live in the South Plains and dressed sales of $187 in Kansas were at volumes just sufficient to set a trend. The possibility of lower cash levels continues.

“We will be working through peak fed cattle supplies for the early summer in the next week or two and domestic beef business is expected to pullback post July 4th,” said Troy Vetterkind of Vetterkind Cattle Brokerage. “This likely means the cash fed cattle market has another couple dollar risk to the down going into the end of the month, but it appears the futures have priced this in already so the cash shouldn’t get much below $116-$117 basis Texas cash in the next couple weeks.”

Live cattle futures traded mostly sideways in the first part of last week with little direction.

“Futures are marking time to see where this week’s cash fed cattle trade ends up,” said Vetterkind on Wednesday. “Still feel we have room to trade up to $123.50- $124 in August live cattle and $127-$128 in October live cattle but I would think we are going to need to see both these contracts hold $122 and $126 respectively for the balance of this week in order for that to happen.”

He said that it feels like the near-term futures have seen their summer low—a position asserted by Andrew Gottschalk of Hedgers Edge for some weeks now—and that if a break occurs following the holiday, August would find support at $120 and October at $123-124.

Compared to their prior Friday closes of $122.03 for August and $125.68 for October, by Wednesday afternoon, live futures were mixed. August settled early on Wednesday at $121.95, an 8 cent loss to its prior Friday close, and October gained 55 cents over the week with $126.23.

Given the short week last week, the industry anticipated a 570,000-580,000 head production week. This week will be a normal production week with around 640,000-650,000 head processed. Tightening supplies of feeders going forward could begin to bite into packers’ profits, which have been running fairly consistently around the $70/head area.

A good portion of this maintained profit level has to do with the continued high values of the cutout. Compared to the prior Friday’s close of $197.50 for Choice and $187.15 for Select, by Wednesday afternoon, Choice had moved up to $197.73 and Select had gained $1.32 at $188.47.

“Product values continue to hold better that expected at these lofty levels hovering near initial support a $198,” commented Gottschalk. “That said, the dog-days of summer must still be navigated and lower prices are expected. Long term support this summer should be uncovered at the $188-$191 level. Post July 4th selling pressure is expected to intensify.”

Just before the holiday, Gottschalk explained that demand was in the hands of consumers, though retailers are trying to encourage beef movement as best they can.

“Product remains ‘iffy’ at best, with the typical summer doldrums directly ahead.

Good action for first of the month, holiday-type business may provide for some fill-in support, however. One purveyor here in the Rocky Mountain region is offering strip steaks for $4.99/cwt (preferred customer-card program). Hopefully that will move product—it is certainly price attractive.”

While the build-up to the July 4 holiday kept things— particularly end meats and ground—moving well, now that the pre-holiday beef buying is come and gone along with the festivities, concern remains for demand going forward. Vetterkind described retail purchasers as “comfortable with inventories” and taking a “wait and see” approach to committing to more product.

Loin and rib cuts are becoming more available as demand has slackened and that is dragging on the overall carcass value. The export business, particularly for end meats, has helped hold up the values, however.

One bright spot on the domestic demand front last week was the National Restaurant Association’s Restaurant Performance Index, which saw its largest singlemonth gain since December 2011 in May. At 101.8 (where 100 is the demarcation between expansion and contraction in the restaurant sector), it is the highest level it’s been since it peaked last March. This was the third straight month posting positive restaurant performance.

Much of this increase came from increases in same-store sales and customer traffic.

“Sixty-three percent of operators reported higher same-stores sales in May relative to one year ago while only 23 percent reported lower sales,” Steve Meyer and Len Steiner of CME’s Daily Livestock Report.

While beef and beef-serving restaurants were not specifically mentioned, since beef features heavily in many restaurants’ menus, improved restaurant performance is a positive thing for the market.

Feeder cattle

Given the short week from the holiday, many feeder sales were closed last week. Numerous sales had no medium and large 1 class (#1) steers to report, or too few for a market test.

Nebraska: In the Loup City Commission Co., there was a light test of calves which were called steady with the prior week’s sale. There were no #1 steers reported, with only medium and large 1-2 class cattle, and light ones at that, reported. Slaughter cows were steady to down $2, though it was noted they were not as attractive as in prior weeks, and slaughter bulls were steady.

Oklahoma: In the Tulsa Stockyards, yearling feeders were called steady on a light test, with steer calves also steady on a light test, but heifer calves steady to down $3. Slaughter cows were called steady to up $2, bulls were steady. There were 18 head of 726-pound #1 steers sold for an average of $138.18. At the National Stockyards, feeder steers and heifers traded $3-5 up on good demand. Calves of both sexes were not well tested. One hundred and sixty-two head of 783-pound #1 steers sold for an average of $145.05. And in the Union Livestock Market of McAlester, yearling feeders were too few for a market trend, but calves took the spotlight with steer calves going for $2-6 higher than the prior sale with a few pee-wees going for as much as $12 higher, while heifer calves were generally up $4- 8 with $12 discounting on pee-wee heifers. Cows, excluding Lean cows, were steady to $3 up. Leans were down $5-6. Bulls went for $2 more. Seven head of 769-pound #1 steers sold for an average of $137.99.

Washington: At the Stockland Livestock Auction of Davenport, there were too few sales for a proper market trend, but a firmer undertone was noted. Slaughter cows and bulls were called $2-3 higher on active trade and very good demand. There were no #1 steers to report.

“Cash feeders remain firm on tight supplies and good buyer demand,” reported Vetterkind. “I would suspect this cash strength continues for the next couple of weeks given what the futures are implying.”

Feeder futures fared better than their live cattle compatriots. Compared to their prior Friday closes of $149.45 for August feeders and $151.60 for the September contract, both gained nearly $1.50. By close of trade on Wednesday, the August contract stood at $150.95 and September stood at $153.

“In the feeders, August is likely going to run out of steam at this $152-$153 price level,” opined Vetterkind. “For the time being, I think the mid-$150’s area in deferred feeder futures is going to slow their advance and would look for a pullback in October forward to find support at $150.” — WLJ

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