Shutdown uncertainties trouble markets

Oct 4, 2013

Last week’s big news of the government shutdown has gratefully not impacted too many sectors of agriculture. If the embarrassing lapse of the government came and went for you with little fanfare; awesome! Unfortunately, the same could not be said for the markets. Mandatory reporting of live cattle and feeder sales, cutout prices, cut-specific prices, export data, and many other things were deemed non-essential and ceased last Monday.

The CME futures markets are still up and running… for now. However, CME has said that a prolonged shutdown could quickly impact its ability to report elements of its agricultural commodities. Among those products likely to be affected are the October contracts for live and feeder cattle. The CME Feeder Index similarly is under threat.

Hopefully by the time you read this, Congress has collectively sorted itself out and things will return to normal in the markets. As Andrew Gottschalk of Hedgers Edge likes to point out, “uncertainty is the enemy of the markets” and a lack of data is a lot of uncertainty.

But—to the numbers! What numbers there are to be had, anyway.

Cash trade was again slow to start throughout the week. Analysts expected another Friday trade again. Whether this additional installment of the wait-‘til-Friday mindset would have happened anyway or was a result of the market uncertainty is hard to say.

“With the reporting agencies shut down, everyone will be operating by the seat of their pants,” said Gottschalk. He said this would have a negative tone for cash trade in the near term.

“The uncertainty over formula pricing created by the government shutdown may hamper trade near term until some agreement can be reached among producers and packers as to how settlement prices will be determined.”

Expectations were for a steady to weak trade compared to the prior week, which saw prices at $126 live and $1.98-$2.00 dressed. By Thursday, limited bids of $123 live in the South Plains opposed asking prices of $126- 129. Corn Belt bids of $195 dressed similarly lagged behind asking prices by $5-8.

“Showlist appear to be a little smaller this week with a few more negotiated cattle on offer and a few less committed cattle for sale,” reported Troy Vetterkind of Vetterkind Cattle Brokerage last Thursday.

“This would normally mean that packers have to do more business in the cash market; however they are keeping chain speeds curtailed this week as margins continue to run in the red.”

Packers have indeed been seeing red. Despite a nice run of profits this year, the run-up in cash trade has eclipsed product values and seasonal consumer demand hasn’t gotten into gear yet. Last week saw them losing about $40/ head.

Weekly production rates for the prior week and expectations for last week declined as the week progressed. By Thursday last week, the expectations were for a 625,000-head production week.

“There are a few packers trimming hours due to poor margins,” said Vetterkind. “And I believe Creekstone Farms is still dark due to a fire at the plant last week.”

As mentioned, the futures markets were still up and running last week. In the live cattle markets, there was either some price correcting going on as has been predicted for a while, or market participants were ratcheting back their involvement due to the shutdown-inspired uncertainty. Or maybe both.

Over the course of last week, both near-term contracts lost value. The October contract shed 82 cents with its Thursday close of $127.43 but the December contract lost only 29 cents with a close of $131.78 “Kind of a quiet day in the cattle futures yesterday,” said Vetterkind Thursday. “Live cattle battled resistance at $128 in Oct and $132 in Dec and in the end settled below those levels again. We continue to see liquidation selling in the October ahead of first notice day for deliveries on Monday.”

He pointed out that USDA considered graders essential so USDA graders will be on the job to grade any live cattle deliveries this week.

“But the uncertainty surrounding slaughter levels and beef pricing does keep somewhat of a ceiling over the live cattle futures near term and still feel we could see the market drift lower near term until more is known about the outcome of this week’s cash trade.”

Reports didn’t exist last week for exact prices paid for specific cuts nor on the cutout values, but Vetterkind reported the undertone in boxed beef remained “largely unchanged.” The prior week saw Friday close with $192.63 for Choice and $176.15 for Select. Last Monday, the only day last week with cutout value estimates, placed Choice at $193.25 and Select at $177.61.

Vetterkind reported that a lot of beef buyers have reverted to a “hand to mouth procurement strategy” because of the uncertainty in slaughter levels and pricing of product. “This likely keeps cutouts trending sideways until some clarity comes back to the market.”

On the domestic demand front, October beef buying has not yet picked up in consumers, but that seasonal shift should be just around the bend.

“Wholesale beef prices remain undervalued relative to pork,” Gottschalk pointed out early last week. “This should allow beef to capture additional ad space in a period when pork is normally heavily featured. Beef demand has gained on pork demand since mid-August.”

He also explained that retail margins for beef have remained positive and that the current prices support continued positive margins.

“To fully minimize retail beef margins, the Choice beef cutout needs to reach $206. This would equate to a fed cattle cash price at $134-$136. The latter cash price level is our projected high for the New Year given our beef production estimate and normal winter weather.”

Feeder cattle

Though the shutdown impacted the USDA reporting of the feeder markets, the sales still ran. By all accounts, people still want feeders badly.

“I watched a few cash feeder cattle auctions on the internet yesterday,” reported Vetterkind mid-week. “At the respective sales compared to last week the market didn’t look any cheaper and in fact the cattle were probably a little higher. The few sales I saw in Missouri yesterday had 750 lbs. steers bringing in the upper $150s to lower $160s and there were reports of 740 lbs. steers in La Junta, CO yesterday bringing in the lower $170s.”

California: Demand for yearling steers was up at the Escalon Livestock Market. Yearling steers weighing between 600-800 pounds sold for between $120-140. Holstein steers of the same weight area sold for $80-93. At the Turlock Livestock Auction Yard, a special feeder sale brought active bidding and good demand. Yearling steers weighing between 700-800 pounds sold for $125-156.50. Holstein steers went for $70-96.

Kansas: At the Winter Livestock Auction, over 3,500 head sold to a welcoming demand. Yearling feeders sold up $2-5 and calves sold up $5-10. Mid-700s steers sold between $167-173.

New Mexico: At the Clovis Livestock Auction, over 2,000 head sold to good demand. Prices for calves were up $5 and yearlings sold up $3-5. Only 18 head of steers in the 700-pound range sold for $160.

Feeder futures markets were also in an overbought condition last week, but as yet corrective action hasn’t hit. Over the course of last week, the October contract lost all of two cents with a Thursday close of $164.10. The November contract gained 71 cents with a close of $165.63.

“Certainly don’t see anything technically in the feeders that indicates the rally is close to being over,” opined Vetterkind.

“Ideas that the cash feeder markets remain strong and that the CME feeder index will continue to move higher buoyed the feeder futures as they now take aim on $170 type price targets basis the Nov. November feeders still look positive on a trade above $164 and until we close below that traders will be looking to buy breaks. Hedgers on the other hand need to be using this strength to buy put options under the market to get a floor price on expected production going into the first half of next year.” — Kerry Halladay, WLJ Editor