Zilmax Impacts

Aug 16, 2013

The cash fed trade last week was at a trickle in terms of volume. Throughout the first half of the week, only slightly more than 4,000 head had sold total on the negotiated market. Bids were slow to appear and were mostly ignored in the face of asking prices of $123-124 live and $200-201 dressed.

Analysts were divided on where the cash market was going last week. Andrew Gottschalk of Hedgers Edge predicted trade for last week would be at least $1 higher than the prior week on live and $2 higher on dressed, while Troy Vetterkind of Vetterkind Cattle Brokerage opined it would be “much lower” last week compared to the prior week. By Thursday afternoon, a total of 7,500 head had sold total for the week and no prices had yet set a trend for steers. Live heifers across all grades were being called $124.

Live futures continued their shallow rally last week. Compared to their prior Friday closes of $122.50 for August and $126.87 for October, Thursday afternoon’s settlement saw both contracts gain about $1.20 with August at $123.70 and October at $128.10.

“Futures continued to inch higher yesterday as we finally start to take aim on price counts of $125-126 in August live and $129-130 in October live that we talked about several weeks ago,” said Vetterkind last Wednesday. “I would tend to think that the rally begins to slow down as we approach these price levels as those price levels are probably the top end of the cash fed cattle market for the late summer/early fall time frame.”

The recently announced move from Tyson that it will stop accepting cattle fed Zilmax has seen a lot of marketrelated commentary for its potential to impact the markets. Following the announcement, futures rallied on the thought that beef supplies would decline more than expected, as reported last week.

Since then there have been a variety of opinions and perspectives voiced on potentials.

John Michael Riley, assistant Extension professor at Mississippi State University, pointed out some market-relevant details regarding the move.

“Recent literature (Scramlin et al., 2010) indicates Zilmax adds 28.4 pounds to the dressed weight of cattle fed the supplement when compared to a control group. Assuming that 80 percent of all fed steers and heifers sold in the market are provided the supplement, and assuming that Tyson procures 25 percent of the cattle (as multiple media outlets have proclaimed), this 28 pound per carcass decrease would result in approximately a 1.8 percent decline in beef production.

“Using the projections from the WASDE, the fourth quarter 2013 production could drop by 113 million pounds. Also, if Tyson continues the policy throughout 2014, the decline could amount to a drop in beef production of 434 million pounds. Granted, these reductions are small (-0.4 percent for 2013 total production and 1.8 percent in 2014); however, in a tight supply market the implications carry some weight (pun intended) as was seen in the market reaction following the announcement by Tyson.”

The guys over at CME’s Daily Livestock Report— Steve Meyer and Len Steiner—had some slightly different numbers and different opinions.

“[T]he supply impact of Tyson’s decision was very dependent upon whether other packers following their lead. Combine the competitors’ decisions to not follow Tyson’s lead with Tyson’s continued acceptance of Optaflexx-fed cattle and we don’t see where there will be a material impact on fed beef supplies come September 6. The only change would be a slight reduction in weights (our sources say 6-8 pounds, on average, per head or about 1 percent) for the 25 percent or so of all fed cattle that are processed by Tyson. Those figures would suggest a total decrease of less than 0.25 percent.”

They did point out, however, that “the Jury is out” on the issue and that beta agonists are important players in the overall economics of packing plants.

Vetterkind’s perspective on the matter was one of a more practical and hands-on nature.

“I guess I’m probably not going to get all bulled up over the Zilmax announcement from Tyson last week,” he said last Wednesday. “If I’m going to be long live cattle I’m going to be short feeders against them as Oct feeders/Oct fats and Nov feeders/Dec fats look like they are breaking down technically on the charts and there is a very strong seasonal going back to the 1990s for these spreads to top out during July/August days.”

For more information, see the article on page 6 regarding the potential market impacts of the Tyson/Zilmax situation, as well as Pete’s comments on page 2 of this week’s issue.

The recent weeks of reduced production have intersected well with the calendar of consumer demand and cutout prices and cutspecific prices. On the one hand, the reduced production weeks lately have helped move the cutout up slowly. As of Thursday, Choice stood at $193.30 and Select at $185.71, up from the prior Friday’s $188.99 and $182, respectively.

But even though these cutouts are moving up, there are still good retail margins being made, meaning markets are featuring beef more aggressively.

“A $5.99 choice strip ad was posted by a major retailer in Denver,” reported Gottschalk. “This is $1 per pound under early summer prices. This is a direct reflection of an improvement in the margin structure following the sharp break in cutout values from their record highs.”

He said he expects to see continued good beef features through October.

Add to this that detail retailers are beginning (or ending, depending on who you talk to) their procurement of end meats for fall’s colder weather and the inevitable roasting and crockpotting that goes on in consumer kitchens. All of the situations involved are good things.

“Packers already have a lot of beef sold out forward that needs to deliver this week and next, which is enabling them to raise their offering prices on most beef cuts as spot production goes to satisfy the forward sales leaving them with manageable cooler inventories,” said Vetterkind. “I would continue to look for higher beef markets going into Labor Day.”

Feeder cattle

“Cash feeder markets remain on a roll with most auctions reporting their feeder offerings bringing $2- $4 higher compared to the previous week,” reported Vetterkind.

“Nothing to indicate the cash feeder cattle rally has run its course yet. The industry continues to deal with excess feeding capacity and tighter year over year supplies of available cattle to place on feed. This combined with prospects of much lower feed grain prices this fall is keeping buyers in the market competing for available supplies.”

Cash feeders were indeed doing well with yearling medium and large 1 (#1) steers bringing fetching prices in the low- to mid-$150s. That is, when they were available.

Iowa: At the Bloomfield Feeder Cattle Auction, trade was called active and demand was very good for the nearly 2,000 head sold. The majority were over 600 pounds. Several hundred head of #1 steers in the 700-pound range sold for between $158-160.

Montana: At the Public Auction Yards of Billings, there were few feeder cattle sold, and then only heavyweight heifers. Slaughter cows sold $1-3 higher while slaughter bulls sold steady. At the Billings Livestock Commission, the situation was basically the same regarding feeders with only a few heifers offered. Slaughter cows sold for between $81-83 for Breakers and $77-79 for Boners.

Oklahoma: Things were going along at good prices in Oklahoma’s sales. In the Southern Oklahoma Livestock Auction of Ada, all classes of feeder cattle were lightly tested but showed “definite higher undertones.” Slaughter cows were called up $1-2. Just under two dozen head of 724-pound #1 steers brought $150.04. At the Union Livestock Market, this price was in the range reported. Oddly enough, the usual pattern of higher prices for lighter animals was reversed with a 67-head lot of 791-pound #1 steers selling for $151 while 15 711-pound #1 steers sold for $145.93. There was no explanation of differing quality or something which might indicate this unusual occurrence. At the El Reno sale, things were usual, but quite high, with #1 steers in the 700-range fetching between $155.64-159.75.

“While feeder cattle remain in an uptrend the word here is ‘caution’ following the sharp gains from the spring lows,” advised Gottschalk. What goes up must come down as the saying goes.

Feeder futures traded mixed but largely sideways last week following gains in the corn markets. Compared to their prior Friday closes of $153.85 for August and $157.47 for September, by close on Thursday, those values had moved to $154.10 and $157.07, respectively. — WLJ