Cash fed, live futures surprise

Markets
Sep 3, 2013

Cattle feeders’ reaction to the bullish Cattle on Feed (COF) report of holding firm on higher asking prices, and packers’ theoretic position of leverage with larger showlists and buying for a short kill week this week had the two parties on the sidelines of cash trade last week. Packer bids were few and far between through Thursday and mostly passed over by cattle feeders, proving analyst expectations of another Friday trade correct.

“Right now I would call the market steady, with lackluster beef business, larger showlists, and a futures market that remains lethargic as reasons for the uninspiring cash trade,” opined Troy Vetterkind of Vetterkind Cattle Brokerage. He later predicted that if the market was going to be anything other than steady with the prior week’s cash prices—$123-125 live, $197 dressed—the increases would come in the north.

Live cattle futures were affected by the various outside elements of the COF report and the corn market through its connection to the cash fed market and both feeder markets, but it did not react quite as expected. Over the course of last week, near term live futures gained modestly, though they did not hold onto rallies from earlier in the week.

“Live cattle futures did open sharply higher yesterday but the near limit gains in the corn market sent feeder futures almost limit lower by the close and this held further gains in the live cattle futures in check,” said Vetterkind on Tuesday after the effects of the COF report and corn market surge took hold.

“I too thought we would see a better performance out of live cattle futures yesterday, and we could still see some further upside in the live cattle futures yet this week if the pressure comes off the feeders at some point. But I guess my idea of the market this week was that it all hinged on strength in the futures market, because my fundamental ideas haven’t changed.”

There was eventual strength, with the aforementioned gains coming later in the week. Compared to their prior-Friday closes, the August live cattle contract settled with $123.55 (45-cent gain), October stood at $126.98 (28-cent gain), and December at $130.25 ($1.03 gain). Vetterkind said he still felt there was some downside potential in the form of a correction.

“I still feel we have some risk for a downside correction, which would take Oct cattle down to $125-$125.50 and Dec down to $128… Also still believe that a short term correction would be just that, a short term correction, as I still think we can see higher cash fed cattle and futures markets going into the month of October.”

Andrew Gottschalk of Hedgers Edge also was of the opinion the fed cattle futures were in an oversold level and due for a corrective phase.

“Basis the October futures, long term support exists at $125.50, a level which should hold any price correction,” he said. “Technically, trade below $126.50 basis the October cattle contract could spark some additional near term weakness.”

The beef markets slowed down last week as topped product values trended lower and cut-specific prices showed the effect of retailers which had already procured product for the long Labor Day weekend. Over the course of the week Choice product lost 48 cents with its Thursday close of $195.71 compared to its prior-Friday close of $196.19. Select lost 89 cents with a Thursday close of $183.20.

While last week saw a slowdown, there is potential for renewed interest soon.

“The Labor Day period and the month of September should benefit from stepped up retail beef features as a result of improved retail beef margins,” said Gottschalk. “Beef features drive beef sales and the month of September should not disappoint.”

He opined that product has topped in the past weeks and that support should be found at $191 for Choice.

While there may be more retail beef features in the future, and that often implies greater consumer consumption, Steve Meyer and Len Steiner of CME’s Daily Livestock Report pointed out that there are very few actual measures and predictions of consumer demand and future intentions.

“But there is a new effort at characterizing and measuring demand,” they said.

“Dr. Jayson Lusk at Oklahoma State University has developed the FooDS (Food Demand Survey) system that conducts a monthly, online survey of 1,000 consumers to gauge their willingness to pay for various food items and their awareness and concerns about many aspects of food and food production.”

The effort is still relatively new with the mid-August survey report being only the fourth one, but the potential value of an active attempt to gauge and predict consumer purchasing intentions cannot be understated.

The survey has its own metric regarding consumer demand, but ultimately it boils down to consumer willingness to pay. According to the results of that mid-August survey, there was monthon-month increases in consumers’ willingness to pay for beef steak (6.4 percent), pork chops (10.9 percent), deli ham (4 percent) and chicken wings (12.4 percent). Respondents reported decreased WTP for chicken breast (1.75 percent) and hamburger (0.7 percent).

When it came to consumers’ expected buying behavior and price projections in the “coming weeks,” respondents reported an expectation of reduced purchases of beef and higher beef prices.

“It is difficult this early in the process to put the results in context after just four months of surveys but we think this is an effort worth of watching,” opined Meyer and Steiner. WLJ will be watching this report in the future as well.

Feeder cattle

“[U]nseasonably hot temperatures in moisture deficit regions of the Cornbelt may cause a reprieve in the advance in feeder and calf prices as grains post additional gains,” said Gottschalk.

And they did exactly that last week.

Many feeder cattle auctions cited heat and humidity as putting a damper on demand for feeders, particularly calves. Yearling feeders were again hard to come by, with very few auctions reporting trends on them. The offerings of medium and large 1 class (#1) steers were spotty with availability being only a few at a time.

California: Things were steady at the Cattlemen’s Livestock Market in Galt with all classes of cattle on an even keel price-wise with their previous sale. #1 steers between 700-800 lbs sold for $135-148. There was a light test on beef feeder steers over at the Turlock Livestock Auction Yard, but Holstein steers were said to be selling at stronger prices than their prior sale. Holstein steers between 700-800 lbs sold for between $70-102.

Kansas: At the Winter Livestock Feeder Cattle Auction, there were far too few sales of just about any class to call a market trend. The tight supplies of yearlings are being felt. Trade was called slow and demand light to moderate. A few dozen head of mid-700s #1 steers sold for $158.75.

Montana: In the Public Auction Yards of Billings, just 500 head sold. There were too few cattle of any class to set a market trend. Demand was called moderate to good. There were no mid-700 #1 steers to quote, but a handful of cattle in bookending weight classes sold between $152-163.50.

Nevada: The Fallon Livestock Market was the brightest spots on the feeder cattle sales circuit observed last week, with feeder cattle called up $5-23 on good, active demand. #1 beef steers between 700-800 lbs sold for $145-153, while similarly weighted Holstein steers sold for $70-80

Oklahoma: As in Missouri, the many sales of Oklahoma saw decreased interest in calves due to the recent heat and humidity. Steer calves were mostly down $3, but with instances of down $8-12 for lights. Heifer calves were steady at best, but mostly down to the same levels as steer calves. The availability of yearlings was spotty, though when they were offered, yearling steers at least tended to be in the higher weight ranges. The mid-700s offering of #1 steers sold between $148.57-153.85.

Near-term feeder futures did not react as expected to the COF report. While the bullish implications of the very low placement numbers might have suggested an increase in near-term feeders, the surges in the corn futures wiped out that potential. See below for more information on the corn markets.

“October feeder futures violated previously identified support at $158.30 turning that trend ‘down’ for the short term,” reported Gottschalk on Tuesday after some of the COF/corn dust had settled. “That said, yesterday’s lower close has placed the October feeders at an ‘oversold’ level which should limit selling pressure.”

Compared to their prior- Friday closes, near-term feeder futures were mixed but mostly lower. The August contract gained all of 5 cents with a Thursday settle of $155.05. The September contract lost 42 cents at $156.23, and the October contract lost 85 cents with $158. Vetter kind was not bothered by this downturn and recommended trading the $155-160 basis for the October and November contracts.

Grain market

“It was not long ago that livestock and meat analysts paid very little attention to grain markets,” commented Meyer and Steiner. “But the dawn of subsidized and mandated biofuels and the nowobvious fact that the weather is not always favorable have put crop prices back into our set of calculations on a regular basis.”

The activities of the corn market—spawned, according to some, by the activities of the soybean market—played major havoc with the cattle markets.

Gottschalk pointed out that issues of heat and dryness in Illinois are dragging on the overall corn yield estimates.

“Illinois, to-date, is reporting the seventh driest August on record. What does all this mean to the market? Corn will not be as cheap at harvest as previously expected and basis levels are expected to remain much stronger than normal for corn into the spring.”

Vetterkind said the problem with the corn market last week was the bean market’s problem with weather. “[W]e are right in the middle of filling pods and it’s hot and it’s not raining. So there is no telling how much higher beans could go and in the process dragging corn along with it.”

“So why the sudden reaction?” Meyer and Steiner asked.

“First, the forecast for much of the Midwest is for very high temperatures this week with little or no precipitation in sight. We have been talking about the advancing dry conditions from northern Illinois westward for some time… “The game changer, though, is heat. Where on year ago the Midwest was dry and abnormally hot beginning in June, those excessive temperatures have not been seen for any extended stretches this summer. Until now.

We aren’t agronomists but our experience is that corn and soybean plants can handle some heat if moisture is available and can handle some dryness if it is not too hot but the combination of dry and hot is lethal.”

Between the prior Friday’s open and last Monday’s close, December corn jumped 36 cents/bu to $5.00’4/bu with most of that gain happening during Monday trade. Soybeans similarly shot up during that time frame, from $12.90/bu to $13.89’4/bu.

After that, what Gottschalk called “a yo-yo affair” developed. By the close of trade on Thursday, December corn had gained just over 11 cents/bu compared to its prior-Friday close with $4.81’4/ bu. Similarly, the November soybean contract had settled down and had only gained slightly over 40 cents over the span of the week with $13.68’4/bu on Thursday afternoon. — WLJ

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