Live futures set-up sparks anger

Markets
Jul 22, 2013

Cash fed trade last week was holding its breath for the release of the Cattle on Feed report, which came out Friday. Due to the release time of the report relative to WLJ’s publishing timeline, look for our story on the report online now at www.wlj.net or in next week’s paper.

Showlists were said to be smaller last week, but expectation of what the Cattle on Feed report might hold kept bidding at a minimum and next to no trade by Thursday afternoon. Analyst expectations started the week at steady at worst, but as the futures markets tumbled on Wednesday, expectations fell to steady to $1 down, dependent on the report.

Wednesday’s live cattle futures break came on the heels of concerns over beef demand going forward. Though last week’s anticipated cattle processing was pegged at 645,000 head—consistent with the recent non-holiday weeks—there is concern that softening wholesale beef prices could force packers to reduce slaughter and lower bids on cattle in the coming months.

Troy Vetterkind of Vetterkind Cattle Brokerage also had some choice words for the nature of the markets themselves, blaming them heavily for some of the problems.

“Trade volumes remain dismal as more and more participants refuse to trade a market that is open 23 hours a day and is raped continuously by predatory high speed/algorithm trading firms that distort the true price discovery process,” he said.

“The CME has got to come to grips with the fact we don’t need livestock markets open virtually around the clock and they have to shorten trading hours in cattle and hogs and restore some confidence in the market.”

Over the course of the week, near-term futures gained slightly despite the break on Wednesday. Compared to their prior-Friday closes, August gained 25 cents with a Thursday settle of $122.10 and October gained 40 cents with $126.48.

Over the course of last week, the Choice cutout value dropped another dollar and change to maintain the recent decline. Compared to its prior Friday close of $191.53, by Thursday afternoon, Choice had fallen to $189.30.

“A worst case scenario would target $186 for the choice cutout,” said Andrew Gottschalk of Hedgers Edge. “At that level retail beef margins would be maximized which should encourage stepped up interest by the retail trade. Such action is often the catalyst to a trend change.”

Select actually gained slightly in the process, going from $183.67 the prior Friday to $183.73 by Thursday. If cutout prices for Choice do continue down while Select holds, it has the potential to help retail beef interest. Steve Meyer and Len Steiner of CME’s Daily Livestock Report pointed out that consumers are interested in dollars— not percentages—when it comes to buying groceries..

“[I]t is clear that real beef prices have risen more in dollar terms than have the prices of the competitors. And unlike the 1998-2004 price growth that was driven by stronger beef demand, the recent increases have been caused primarily by tighter and tighter supplies. A product can do that for only so long before becoming a luxury.”

That is a market stigma that the beef industry wants to avoid.

While seasonality might have caught up with the domestic beef market as Meyer and Steiner claim, exports were doing well last week. Exports stood at 15,800 metric tons, up 21 percent from the previous week and 6 percent from the four-week average. Japan, Hong Kong, Mexico, Canada and South Korea were the primary destinations.

Feeder cattle

The feeder market seems to be showing the effects of both a couple weeks of sustained good prices and demand, and modern technology. Medium and large 1-class (#1) yearling steers were again in short supply in many markets.

“Supplies coming to market remain below year ago levels and buyers are aggressive, especially on true yearling cattle to place and market into the fourth quarter of the marketing year,” explained Vetterkind.

Slaughter cows were no longer the superstars they have been in recent weeks as the span between now and the next grilling holiday is a ways off. On the video auctions, however, demand is alive and well and quoted prices seem to be better overall than in in-person negotiated sales. There’s something to be said for the ease of access video markets provide.

California: At the Escalon Livestock Market, beef steers between 600- 800 pounds sold for between $90-118. Holstein steers of a similar weight range sold for between $65-80.

Internet: Video auctions are in their prime season lately, with hundreds of thousands of animals being sold online and via satellite. In the most recent Superior Livestock auction, yearlings went for $5-10 higher and calves for $7-15 higher than their last auction. A batch of southern, preconditioned, crossed, 750-pound yearling steers out of Kansas sold for $151 on August delivery. Some 750-pound black and Red Angus steers out of Wyoming sold for $154 on September delivery.

Montana: At the Public Auction Yards in Billings, stocker and feeder cattle plus feeding cows were lightly tested, making a comparison difficult though they were generally called steady. Slaughter cows were also steady, but slaughter bulls were $1-3 lower. There were no #1 steers in the 700-800 pound range sold, though there were many weight options both above and below that area.

New Mexico: In the Clovis Livestock Auction, calves of both sexes were down $2-3 on limited comparable sales. Heavier yearling feeders were $2-3 higher. Slaughter cows and bulls were called steady to down $1. Three head of 755-pound #1 steers sold for $144.50. Majority of feeders offered were in the medium and large 1-2 category.

Oklahoma: Yearling steers were hard to find in Oklahoma’s sales. In the Southern Oklahoma Livestock Auction, they were too lightly tested for a market trend, though good demand was seen for calves which were steady for both sexes. In the National Stockyards, yearlings were steady to down $2 while steer calves were up $2-4 and heifer calves were steady to up $3. The National Stockyards apparently had the state’s supply of benchmark #1 steers, with 380 774-pound #1 steers selling for an average of $147.20. At the Woodward Livestock Market, slaughter cows were down $2, with high-dressing Breaker and Boner cows going for $83-83.50 and $83-87, respectively.

Another impact being felt—and likely to continue to be felt—in the feeder world is the decline in feeder cattle imports from Mexico. Meyer and Steiner pointed out the flow of feeder cattle from Mexico has declined sharply of late.

“We think the impact on feedlot supplies in June was significant.” Based on the average of analysts estimates (down 5.1 percent), feedlot placements in June were around 1.579 million head, 85,000 head lower than a year ago. Imports of Mexico feeder cattle in June, based on the weekly trade statistics, were 39,839 head compared to 112,863 head a year ago. So the reduction in Mexico feeder cattle imports alone accounts for a 73,024-head decline in placements. Feeder cattle imports from Canada are about 2,000 head higher than a year ago.”

While live futures only posted slim gains after recovering from the midweek break, feeder futures enjoyed several days of nice rallies. Thursday trade alone saw almost $1 gains in the near-term contracts. Compared to the prior Friday, where August closed at $150.12 and September closed at $152.72, Thursday’s settle saw the week gain almost or just over $2 for both contracts. August closed with $152.08 and September at $155.05.

“Besides spillover support from the live pit and ongoing ideas of shrinking replacement supplies, the feeder board was further bolstered by weakness in corn futures and growing prospects for a bumper feed crop,” said DTN’s market analyst, John Harrington.

Vetterkind reminded that the support/resistance ranges for August feeders stand at $148-$150 and $153-$154, respectively. He recommended trading that range for now. — WLJ

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