Cutout, cash fed cattle jump high

Markets
Oct 21, 2013

Last Thursday came with word that the government was back up and running. Politics and speculations of the future aside, this was a welcomed change from the market point of view. Finally there are official numbers on cattle sales and beef prices! However, the market party can’t start just yet.

“We do not know at this time how quickly this reporting will resume,” said Andrew Gottschalk of Hedgers Edge.

While the daily-reported data such as daily slaughter volume, negotiated cash fed cattle prices, cutout values, feeder auction reports, and cut-specific pricing are back up and running for the most part, the weekly and monthly reports may not be so lucky.

The cancellation of the October World Agricultural Supply and Demand Estimates report has come at a bad time. The uncertainty will leave corn markets guessing about yield and production until the mid-November report. The cattle markets might be spared a similar fate as the Cattle on Feed report originally scheduled to come out last Friday has been postponed, though to when is unclear.

Hopefully it comes soon and we can all get back on track of monitoring the markets with a fuller hand of information. That said, on to the markets!

Last week stood out relative to past weeks; cattle actually sold before Friday. Estimates vary, but roughly 12,000 head sold in the South Plains on Wednesday for $128-129 live, steady to stronger than the prior week. Thursday saw cattle sell in both the South Plains and the Corn Belt at volumes that suggested people wanted to get fed cattle trade done. Prices Thursday were again $128-129 live in the South Plains and ran the gamut of $129-131 live and $202- 204 dressed in the Corn Belt. Gottschalk called it “a wild trade day” in the Corn Belt.

“A combination of smaller showlists and packers needing cattle to cover prebooked sales of domestic beef coming into the first of November, as well as what I think was a slug of export business is what prompted the higher cash trade of fed cattle the last couple of weeks,” opined Vetterkind of Vetterkind Cattle Brokerage on Thursday morning.

“We certainly aren’t going to see any major increase in the availability of fed cattle in the coming weeks, but some of this beef business may slow down as the cutout moves into the upper $190s area. This could slow gains in the cash fed cattle market in this $130/$2.04 area. Not that the market is going to break very hard, but perhaps just set back for a week or two before moving into new highs later in the year.”

And the higher cash trade brought the futures up right along with it… momentarily. Last Wednesday saw all near-term contracts gain almost a $1, only to lose those gains and then some on Thursday when all contracts—save October—out to June of 2014 lost over $1.

Vetterkind warned caution, speaking of the futures rally on Wednesday.

“The fact that we’re not sharply higher means that we are narrowing the basis, as well as ideas that the cash trade is likely to slow down for a week or two now that we have cash trading up near $130. Again, I don’t think cash is going to break very hard but we could slow down or back up a couple dollars for a week or two before trading into new highs toward the end of November/first of December. That is why we could see the futures run into some liquidation as December approaches $134-$135 and February at $136-137 in the near term.”

His prediction seemed to come true by Thursday’s settlement with the losses sustained there. Compared to their prior-Friday close, October’s contract had gained only 35 cents with a close of $129.15 and December’s contract lost 70 cents with $131.78.

The guys over at CME’s Daily Livestock Report— Steve Meyer and Len Steiner—commented on the strength of the futures in recent months in spite of the recent action. They pointed out that the monthto-month gains in the live futures from September to now suggest cash fed prices and product values that other analysts don’t expect to see.

“There is little question that live steer values have moved up in the last couple of weeks. Futures expect steer values to add another $4/cwt in November and December and right now bulls appear to have the upper hand, at least judging from the chart trends,” they said. “We need to see the cutout break past $205/ cwt in November in order to maintain the premiums currently built in the December live cattle contract.”

They characterized the “bullish argument” that prices will reach such levels as hinging mostly on reduced cattle supplies, reduced carcass weights (and thereby production) because of the withdrawal of Zilmax from the market, and seasonal demand trends going into December.

“Holiday year-end parties mean increased demand for high priced beef cuts. Consumers that shifted more of their dollar purchases to chicken and pork during the year, also will likely be more willing to splurge on beef in their home celebrations.”

What retail and then consumer demand for beef might be, however, is hard to tell. Glynn T. Tonsor, Associate Professor in the Department of Agricultural Economics at Kansas State University pointed out there has been extensive economic uncertainty in the country of late.

“In September 2013, the US Economic Policy Uncertainty Index was higher (indicating elevated uncertainty) than levels estimated for many prior periods including the “Black Monday” period of November 1987. While October values are obviously not yet available, it seems likely they will reflect even more uncertainty than estimated in September and may well exceed levels previously seen primarily during outbreaks of major military events.”

As Gottschalk often says, economic uncertainty is not good for consumer demand for beef. Beef is a luxury to many, and uncertainty for consumers breeds an unwillingness to make economically risky decisions.

This applies especially for large purchases, but so too does it apply to everyday money decisions like groceries. It remains to be seen if the traditions of brisket for Hanukkah and roasts for Christmas will outweigh pocketbook uncertainties.

Product values are doing their part to make that decision an even trickier one.

Comparing the returned USDA cutout value estimates from last Thursday to the Urner Barry estimates of the prior Friday, product values increased handily. Choice gained almost $4 with a close of $196.03 and Select gained over $4 with $181.72.

“Product values continue to advance in a forced affair,” said Gottschalk, referring to the recent reductions in production weeks.

“The latter is normal as the cash cattle will lead the advance to higher prices while product values are eventually pulled along. The result of this type of pricing action is a continued squeeze on packer margins. This situation will get worse before it gets any better as front-end fed cattle supplies continue to tighten relative to last year.”

Most recent estimates peg packers as losing $46 per head.

Feeder cattle

The runaway honeymoon phase between feeders and cash prices may be ending.

“Cash feeder cattle markets are holding fully steady with last week,” reported Vetterkind. “The official results from the feeder sale at the Oklahoma City Stockyards were released and… prices were called fully steady with last week, but the very top end of the cattle were off a couple dollars. We could have very well put the top end of the feeder cattle market in last week.”

Official price reports started trickling in last week. Though none of the USDA reports had comparisons, some were still found in the private reporting of those auctions.

In California, the Turlock Livestock Auction Yard had a lot of action and what it called “tremendous quality” in its feeder offering at its recent special sale. Steers in the 700s sold between $125-157, which was up a good $11 on the upper end of the scale compared to the prior sale. Same-weight Holstein steers saw a similar $7 increase on the upper end of the range at $70- 104.50. The Escalon Livestock Market stayed steady with beef steers weighing between 600-800 lbs bringing $120-140 and Holstein steers bringing $80-93.

Vetterkind reported sales from Dodge City, KS, saw 650 lbs steers bringing up to $179.50, 750 lbs steers bringing up to $173.75, and 850 lbs steers bringing up to $164.00. “This was certainly the top end of the yearling cattle and, like I said, a couple dollars above the top end from last week,” he said last Thursday.

He did however point to the potential topping of the cash feeder market as the cause behind what he called a sloppy futures market. It certainly was, particularly if “sloppy” means yo-yoing between sizable losses and gains.

Compared to the prior- Friday closes of near-term feeder contracts, the October, November and January contracts each lost about $2 by Thursday’s settle. Throughout the week, the contracts traded losses for smaller gains followed by steeper losses. Tuesday saw nearly $2 losses deep into the board, then Wednesday tried to gain some of it back, then Thursday wiped out those gains. Thursday saw October close with $165.85, November had $166.90, and January had $166.60.

“I still feel we will see some long liquidation in the feeders back near $170 and would expect to see some selling up if there are further rally attempts. I would imagine the feeder index would be somewhere around the mid-$160s and not so sure we won’t see this cash feeder market slow down a little bit in the coming weeks. Again, for the producer, it’s probably prudent to be looking at risk management strategies on further price strength in both live and feeders near term.” — Kerry Halladay, WLJ Editor

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