Futures rally on Tyson announcement

Markets
Aug 9, 2013

Cash trade was again slow to develop last week and that may have turned out to bite packers. Following an announcement Thursday morning by Tyson that it would no longer accept cattle fed Zilmax—the commercial form of the beta agonist zilpaterol— both live and feeder futures rallied powerfully in response. Asking prices on Thursday had increased to $123-124 live and $200 dressed after the rally, leading analysts to expect cash trade would be up $2-3 compared to the recent stagnation of $119 live and $194-195 dressed seen week after week.

“The market’s obvious reaction to this announcement was to rally in anticipation that this action will ultimately cause a reduction in carcass weight and beef tonnage,” commented Andrew Gottschalk of Hedgers Edge. “That would be true if producers did not counter by feeding the cattle for an additional period. This is the likely course of action especially as feeding costs are projected to decline significantly.”

Exactly how long the rally would last was uncertain. During the morning and early afternoon, everything on the live futures board was up over $1 with some contracts over $2. By Thursday’s close, August and October contracts stood at $122.68 and $127.08, respectively. Compared to their prior Friday closes of $120.65 for August and $124.48 for October, the gains for last week were impressive compared to the recent non-movement in the past weeks.

Troy Vetterkind of Vetterkind Cattle Brokerage was optimistic about the effects of the Tyson announcement on futures and the cash market.

“Futures are trading sharply higher on this news and will probably remain that way for the balance of the trading session. There will no doubt be other packers that move to process cattle without beta agonists, which from a tonnage standpoint is bullish the market. This likely helps to put a bottom in both cash beef and cash fed cattle markets for the balance of the year.”

One concern that has been voiced before—in terms of the U.S. and other beef countries accepting beef import countries such as China, Russia and the EU banning beta agonist-fed cattle—is that such a move might make beta agonists for beef and pork go the way of rBST for dairy. Only time will tell whether this move starts a chain reaction towards legitimizing the vilification of these valuable technologies.

For more on the Tyson/Zilmax issue, see the cover story about it in this week’s WLJ.

Slaughter rates began falling the prior week with 625,000 head processed and last week followed suit with an estimated 635,000 head max. These processing numbers are falling as packer profits are flagging. Over the course of last week, packer profits were estimated as floating around the low teens to high one-digits per head. The hope is that lower production numbers will help boost the cutout and in turn help boost profits.

Over the course of last week, it seemed that goal of higher cutout values was slightly realized. By Thursday afternoon, Choice had gained $1.10 at $188.31, and Select had gained $1.15 at $182.05. However, the desire for a higher cutout is potentially at odds with the benefit of the low cutout: improved retail features.

“Product values have bottomed and should be set to trend higher into the fall period,” said Gottschalk. “Expect to see increased beef features during the September to early October period as retail beef margins are being maximized at current retail beef prices. Historically, maximized retail beef margins trump any fed cattle supply concern.”

Earlier in the week he had explained that maximized retail beef margins are often a precursor to an advance in beef cutout values and cash fed cattle prices. “Our expectation is that the current retail beef margin structure will provide the basis for a advance from current levels.”

Feeder cattle

Cash feeder cattle were again selling well, with a surprising volume of heavier medium and large 1 class (#1) steers offered at the surveyed sales. Calves were notably missing in many areas as improved weather conditions in many areas may be motivating some producers to hold onto remaining calves to keep on grass. Internet sales again were numerous and took the crown in terms of prices on benchmark steers.

“Drought conditions in many areas have been alleviated at least temporarily,” said Gottschalk. “This could limit offerings during the month of August.”

California: In the Turlock Livestock Market, demand for feeder cattle was said to be up on the promise of cheap feed. Holstein steers, cull dairy heifers, and cull cows were said to be steady with the prior week. #1 beef steers between 700-800 pounds sold for $115-149. At the Escalon Livestock Market, there had been little change from previous weeks, with #1 beef steers between 600-800 pounds bringing $110-135 and Holstein steers of the same general weight category going for between $80-90.

Internet: Superior Livestock Auction saw some mid- 700s #1 steers recently sold or selling between $135 to high $140s. A lot of 62 800-pound steers raised in Missouri for delivery this week sold for $135. At the time of publishing, two lots in the weight group were in progress; one lot of 65 740-pound steers raised in Texas had an asking price of $148 and a high bid of $145 while another 66-head lot of 750-pound steers from Texas had an asking price of $155 and a high bid of $149. At the Western Video Market, most yearling steers sold were over the 800-pound mark, but most of the mid-700s steers that were selling brought low $150s to low $160s.

Nebraska: In Kearney’s Huss Platte Valley Auction, 2,500 sold with massive value jumps seen in calves, with both sexes selling up $15-20 compared to the prior sale. Yearling feeders sold steady to $4 up. Buyer activity was rigorous and there was good demand. Twenty-five head of #1 steers averaging 753 pounds sold for $163.

Oklahoma: Across Oklahoma last week, feeder cattle were selling well, with yearling steers going for $1-3 higher, with instances of up $10 seen in the Union Livestock Market. Heifers ran between steady with the previous week to up $3, and again instances of up $11 seen at Union. Across the board, calves were too few to set a trend. #1 steers in the mid-700s sold for between $141-152, with most sales trending towards the lower end of the scale rather than the higher end.

Wyoming: The Torrington Livestock Commission Co. held its first feeder sale since May last week, which made for a lack of comparable sales to state a market trend. That said, demand was called moderate to good with decent trade activity. The vast majority of the offering was over 600 pounds. In the upper 700s area, #1 steers were selling for between $147-151.

Another likely boon for the future of feeders is the ever decreasing cost of corn.

“New crop corn ending stocks should exceed 2.0 billion bushels as average yield potential approaches 160 bpa,” said Gottschalk. “This should limit selling pressure on feeders and calves this fall while wetting the appetites of farmer feeders who may choose to walk their corn off the farm. Breakevens on fed cattle this fall and early winter will be substantially below last year allowing the fed sector to return to a period of profitability.”

In the course of a few weeks, corn prices have continued their decline—a great thing for cattle producers, but not so much for corn growers. From the prior Friday to last Thursday, the September corn contract shed another 2.5 cents/bu to settle at $4.73’4 and December declined 4 cents to settle at $4.59’6.

The impact of decreasing corn prices is likely to be wide and varied, as well as being both good and bad. Livestock feeders and anyone with a corn-dependent profit margin will certainly welcome the return to or improved profitability, but the expected large harvest combined with the increasingly lower prices might have ramifications for planting plans in years to come.

But as corn prices fell, feeder futures rose. Over the course of the week, near-term feeder futures increased 52 cents for August contracts at $154.25 and September feeders gained 83 cents with $157.83.

Other outside market details impacting beef besides corn are still a concern, however.

“The US economy is expected to garner some additional momentum during the second half of this year,” reported Gottschalk. “Albeit, the growth will be slower than we all wish it to be. The job outlook remains disappointing as many jobs are part time with lower wage rates. This trend has worsened since April of this year.”

And as Gottschalk and others have mentioned frequently in the past, the availability of discretionary income among consumers is immensely important to beef demand as improved food items are usually the first line of luxury enjoyed by those comfortable with their economic straits. — WLJ

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