Supply issues; Zilmax and cows

Markets
Aug 23, 2013

It seems the cash attention last week was on the feeder sales because negotiated cash fed sales were slow to “dead.” Very few bids and only tiny and sporadic sales had occurred by midweek. By Thursday afternoon only 4,679 head had been confirmed sold, making the volume too low for a market trend. But suspicions remained that packers needed cattle and that need could drive cash trade a $1 higher than the prior week.

“I still believe packers will need to be active in the cash market to get some animals around them to process to fill Labor Day beef orders,” opined Troy Vetterkind of Vetterkind Cattle Brokerage last Wednesday. “Don’t know if they have as many committed cattle in front of them. This will especially be true once we get all of these Zilmax cattle dead.”

The matter of Zilmax has continued to weigh on the market.

“The latest chapter in the Zilmax saga unfolded on Friday [Aug16] when Merck Animal Health, the product’s manufacturer, announced that is would suspend sales of Zilmax, its product containing zilpaterol,” explained Steve Meyer and Len Steiner of CME’s Daily Livestock Report. After relating some documented carcass weight data and how increased lined up with the adoption of beta agonists in feedyards, they concluded beta agonists were “the primary driver” on the surge in weights seen in 2012.

“The economic benefit of these products [Zilmax and Optaflexx] for both feeders and packers is significant and we expect feeders that currently use Zilmax to switch to Optaflexx.”

Earlier speculation pegged the potential production losses over Zilmax being suspended at 2 percent. Meyer and Steiner don’t believe that will come to pass.

“According to our sources, switching from Zilmax to Optaflexx will probably reduce weights by 6-8 pounds or about one-third of the increase observed in 2012.”

While a decrease in production as a result of decreased carcass weights is likely, a smaller decrease than otherwise thought is certainly a good thing from a supply side.

Live futures traded slightly down over the course of last week. Andrew Gottschalk of Hedgers Edge spent a good portion of last week talking about the overbought nature of live futures and predicted a correction. At least by Thursday afternoon, that seemed to have been underway.

Compared to their prior Friday closes of $123.90 for August and $127.92 for October, near-term live cattle contracts dipped a bit to $123.35 and $127.20 respectively.

“Would still feel right now that $129-$130 is going to be stiff overhead resistance in October live as will $131- 132 be in December live,” said Vetterkind. “Same can be said for $160-162 in the October and November feeder cattle contracts. These are areas where I would look to come away from longs and probably be looking to do something on the short side of the market going into the first of September.”

The impending Labor Day holiday has been kind to domestic beef demand while prices are still relatively high on diminished production. Cutout values edged up last week—from $194.39 for Choice and $186.39 for Select the prior Friday to $195.84 and $185.28 respectively as of last Thursday— and made both Vetterkind and Gottschalk call the product market topping.

“Demand remains good for middle meats to deliver ahead of Labor Day and we are seeing improved demand for end meats to deliver throughout the month of September. This should be a positive for cash beef values in the coming weeks, but assume the market is going to stall out as the choice cutout approaches the $200 area again.”

The prior week’s production rate was adjusted down to 617,000 head and last week’s production rate was estimated at 625,000. The stemmed flow of both beef and dairy cows to slaughter has also been felt.

“Improving pasture conditions and prospects for lower feed costs and better producer margins are expected to slow down the flow of beef cows to slaughter in the second half of the year,” explained Vetterkind. Meyer and Steiner had similar comments.

“In addition to fewer beef cows coming to market, the expectation is for dairy cow slaughter to also trend lower. Improvements in dairy producer margins and fewer dairy cows coming from Canada will limit the overall supply of cows.”

Feeder cattle

“Yearling steers and heifers continued to defy gravity,” said Gottschalk of the state of the cash feeder market. Despite concerns about breakevens for cattle feeders, prices continue to advance on feeders with the basis shrinking across the country.

As with the prior week, prices for medium and large 1 class (#1) steers improved… when they were available.

California: There was a light test—in volume and weight—at the most recent Turlock Livestock Auction Yard feeder sale. Offerings of #1 yearling beef steers saw market tests on 400-800 weight classes, with those in the 700 range fetching $125- 150. Holstein steers and beef heifers sold readily at $70- 100 and $122-132.50 respectively. At the Escalon Livestock Market, prices for #1 steers and Holstein steers were fairly comparable with beef steers in the 600-800 range bringing $120-149 and Holstein steers of the same weight area going for $80-93.

Internet: Things were cooking along at the Superior Video Auction. According to the most recent report, with 190,000 offerings, mid- 700s #1 steers were selling just as well online as off. A load of 753-pound steers for September delivery sold for $157.54, another batch of 768-pound September-October deliver sold for $160.74.

A load of 750-pound steers for January-February delivery sold for $154.50.

Kansas: At the Winter Livestock Feeder Cattle Auction of Dodge City, over 2,500 head sold. Yearling feeder steers sold steady to up $4, preference to heavier steers, and yearling feeder heifers were up $2-4. Calves were few, but noted to have a strong undertone. Trade was active with excellent demand. Majority of offering was over 600 pounds. Close to 100 head of #1 steers on either end of the 700-pound range sold for between $154.81-160.59.

Montana: At the Public Auction Yards in Billings, just over 1,000 head sold. Yearling feeder heifers were steady with the prior sale with too few yearling steers or calves for a market trend. Slaughter cows were also steady with bulls steady to up $2. Majority of the feeder offering was heifers. Six head of 705-pound #1 steers sold for $156. Majority of the available #1 steers were in the 800s and 900s.

Nebraska: The Huss Platte Valley Auction saw over 3,000 head sold to large crowds of active buyers. Calves dominated the offering with steer calves fetching $5-10 more than the prior sale, and heifer calves steady to up $3. The small offering of yearling feeders of both sexes brought in $3-5 higher money, with instances of up $9 on heavier steers.

Mid-700s yearling steers brought between $160-169 when they were available. The situation was much the same though on a smaller scale over at the Bassett Livestock Auction, where 16 head of 720-pound #1 steers sold for $165.

Oklahoma: At the Southern Oklahoma Livestock Auction of Ada, yearling steers and heifers were up $3-5. Demand was called excellent for grazing cattle given good growth and abundant hay supplies in the area lately. Most of the offering was under 600 pounds and the only mid-700s #1 steers quoted were a dozen 726-pound calves which sold for $154.57. At the El Reno Livestock Auction, there was far greater volume with 3,831 receipts. Yearling steers were steady to up $1 except for animals over 800 pounds, which sold up $2-3. Over 300 head of mid-700 #1 yearling steers sold for between $156.83-160.

“Feeders are in a very interesting technical position.

Overbought oscillators have retreated approximately 50 percent from their “overbought” condition while futures hover near their recent highs,” said Gottschalk.

Regarding feeder futures, Gottschalk described them as “in a ‘do-or-die’ position.”

“October feeders are continuing to ride the fence line with the major trend remaining up. However, the major uptrend could be violated with a close under $159.30,” he said Thursday. “A close under $158.30 would confirm a short trend reversal.”

Neither of those things happened however, with October feeders closing last Thursday at $160, leaving the uptrend heading up. The nearer-term feeder futures of August and September were in a similar way last week as both contracts gained. Compared to its prior-Friday close, the August feeder contract gained 68 cents with Thursday’s close of $155.45. Similarly, the September feeder contract gained $1.03 with a Thursday close of $157.70.

“In the feeders, basically October and November are going to have some overhead resistance at $161-$162 but are going to have support at $157-$158 in the near term,” opined Vetterkind. “Don’t see the market doing much outside of those ranges right now. … Hedgers should consider using any further strength in fall and winter live cattle futures into the lower $130s and in the feeder cattle into the lower $160s as a place to get cattle hedged as these price points are likely going to represent the best of the cash markets during that timeframe.” — WLJ

{rating_box}