Sideways trade in cash fed, live futures

Jul 26, 2013

The cash fed market surprised last week when trade developed on Wednesday, contrary to analysts expectations of late-week trade. Over 10,000 head were confirmed sold in negotiated cash trade, and while that volume indicates more trade would be left for later on, it was sufficient to establish the numbers.

Cash trade in the South Plains was $119 live. Again. This detail was not missed by either Andrew Gottschalk of Hedgers Edge or Troy Vetterkind of Vetterkind Cattle Brokerage. Gottschalk pointed out that last week would be the fourth week in a row with cash fed at $119 in the South Plains.

“If there is a bright spot in the cattle market, it’s the fact that the cash fed cattle trade hasn’t moved any lower in the last couple of weeks,” said Vetterkind of the month-long sideways trade. “I think that reinforces ideas that we are getting on the back side of our peak fed cattle supplies for the summer and that we are at or very near putting in a low in the boxed beef market.”

Dressed Corn Belt trade was sparse by Thursday afternoon, but said to be setting the stage for the rest of the week’s trade at $191- 193.

The cash market wasn’t the only thing running sideways last week. Near-term live cattle futures contracts have been vacillating around the same ranges for a while now. By Thursday afternoon, the August contract had lost 32 cents over the course of the week compared to the prior Friday’s close with $121.65. October had lost more after a slight break on Wednesday with Thursday’s close at $125.50, a 72-cent loss.

“Today marks one month of the same $2.25 trading range for the August live cattle futures,” said Gottschalk Wednesday. “It has been awhile since a pattern like that has developed. I say ‘pattern’—I guess it is ‘trend.’ Sideways or neutral is still a trend, right?” “[W]e continue to trade either side of $122 in August live cattle and $125 in October live cattle,” said Vetterkind. “We have seen open interest build down at these price levels the last couple of weeks so someone is getting positioned for some sort of move, which way that move goes is still a big question.

“There are still some price counts that suggest we could see August live cattle trade up to $124-$125 and October trade up to $129-$130 technically, but obviously we need to see some strength in the cash for that to happen. Still feel that we are close to putting in a cash low for the summer in the next couple of weeks so one would feel that the downside in the futures is limited. But that is not to say we couldn’t get a flush lower in the futures if we take out support at $121 in August and $125 in October. Hard to say what happens right here as the live futures have been directionless literally since the first of July as again there is simply no trade.”

Vetterkind’s recent passionate complaints against the futures markets being manipulated by algorithmic trades seem to have been validated and then some. The Commodity Futures Trading Commission said early last week that high-speed trading firm Panther Energy Trading LLC had been “spoofing” CME’s commodity markets. The illegal activity involved placing bids and offers with the plan to cancel them before they executed. This charge came with a $2.8 million fine and a one-year trade ban. More on the implications of this finding next week.

The cutout dropped last week again, now flirting with Gottschalk’s “worst case scenario” of $186 Choice. Compared to the prior Friday’s close, Choice dropped to $187.66 and Select to $182.70. A potential benefit of the low cutout is that it seems to have stimulated some movement of beef packers and could also spur on greater retail promotions.

“The cooler weather has sparked some hopes of a good weekend of grilling; so long as the paychecks can hold out,” said Gottschalk. But he cautioned regarding other financial concerns of the season.

“Back-to-school thoughts and ads are beginning to compete for those discretionary dollars. It is tough to think summer is ending and school is starting, especially as hot as it has been. But the calendar is rolling forward— something that should also help with beef prices, as we seek those seasonal summer lows.”

While hopeful thoughts exist for the domestic market, there is cause for contemplation in the export markets. Last week, exports of 15,100 metric tons were down 4 percent from the prior week, but up 1 percent from the prior four-week average. Some historically relevant receivers of U.S. beef are not where they were in terms of volume, however.

For instance, U.S. beef exports to Vietnam in 2011 and the first half of 2012 averaged about 3,800 metric tons per month. For this year, however, exports to Vietnam have averaged about 570 metric tons per month, an 85 percent decline.

China remains disappointing on the beef front, but has a lot of potential, according to Steve Meyer and Len Steiner of CME’s Daily Livestock Report. They pointed out that rising incomes in China have given the Chinese consumer a new-found appreciation for the taste of beef. Beef demand and prices have exploded in recent years.

The spoils of this won battle in consumer tastes are not going to the U.S., however. Meyer and Steiner attribute some of the decline in Vietnam’s beef import from the U.S. to Chinese authorities becoming more diligent about controlling the provenance of beef entering their borders.”

“Official China beef imports have exploded, largely to the benefit of Australian beef producers. In the first six months of the year, China imported 59,596 metric tons of beef from Australia, compared to just 3,226 metric tons during the same period a year ago, a 1,750 percent increase.

Other countries supplying China’s growing taste for beef are New Zealand and Uruguay, both of which have seen their exports to China increase immensely.

“China beef demand will likely persist,” they said. “Especially since the country is unlikely to fill the expanding demand through domestic growth. It is a market that should greatly benefit U.S. beef producers, once the politics of trade has been put on a constructive path.”

Feeder cattle

Feeder cattle markets have been red hot in recent weeks as cattle feeders seek to fill pens with hopes of lower feed costs. Recent corn reports have been positive and have forced corn futures markets to new lows. Heavy yearling feeder cattle have leveled off since the prior week when many markets reported advances of $3-7 on limited offerings. Calves are steady with the prior week. The CME feeder cattle index was at $145.86 last Wednesday.

On the futures markets, the August feeder cattle contract was trading at $152.35 and $155.77, with more strength in the October and November contracts.

Vetterkind saw auction markets around the country as steady to firm in most sales. El Reno, OK, held their first sale last Wednesday since the tornado took the yards down back in May. They had 6,000 head of cattle for their sale and while there is no price comparison to previous weeks, they had plenty of 6-7 weight cattle in the $150s and plenty of 8 weight cattle in the mid- $140s. That’s pretty much where the market is on that type of cattle on the Southern/Central Plains with premiums noted on the same cattle that sell in the Northern Plains. Slaughter cow markets remain firm at midweek.

Oklahoma City: Feeder steers were steady to $3 lower while steer calves were steady. Feeder heifers and heifer calves sold steady to $3 higher with the exception of heavyweights (over 800 lbs.) selling $2 lower. Total calf numbers in the supply is slowly beginning to increase. Last week’s healthy rains across much of the state prompted good demand for calves. Demand was called moderate for feeder cattle, with best demand on lightweight feeders. This demand is driven by the new-crop corn prices that currently hover just under $5 on the board.

Galt, CA, reported yearlings and calves steady with 700-800 lbs. yearling steers trading between $130-142 and 500-600 lbs. steer calves trading between $140-159 on a moderate size offerings.

Dodge City, KS, reported feeder steers and heifers steady except for thin-fleshed calves which were $3-4 higher on good demand as buyers are aggressive to own true yearling cattle off grass.

Kearny, NE, reported that steers were $2-4 higher with instances of 700 lbs steers bringing as much as $10 higher. There was good demand and a large crowd.

Amarillo, TX, saw a light offering of steers and heifers but noted mostly stronger by $2. The past week brought much-needed rainfall to much of the trade area and that slowed the liquidation of new-crop calves and their mothers. Rainfall was still spotted, with some producers not out of the woods yet by enough rainfall to hope for a traditional fall weaning and sale for their calves.

The Northern Plains states posted a regional weighted average on 600- 700 lbs. steers of $164.91 and 800-900 lbs. steers of $147.76. In the Southern Plains states, the weighted average for 600-700 lbs. steers was $149.84. And 600-700 lbs steers in the southeast posted a weighted average of $139.82. — WLJ