Cutout, cash prices don't match

Nov 1, 2013

Minimal sales occurred through Thursday last week. By Wednesday, live trade had developed at $132 in Nebraska and $132-133 in the Corn Belt. Iowa saw $209 dressed trade. All of it was too light for a trend, but analysts expected trade to remain steady to slightly up from those numbers.

“Cattle continue to be shipped from the Corn Belt to Colorado and Kansas to offset tight supplies in those states,” said Andrew Gottschalk of Hedgers Edge.

“The next resistance level is at $136 basis the Kansas market. The most likely timing of the fourth quarter high remains the third week of November, barring adverse winter weather which could propel prices higher into the new year.”

He pointed out that—given the extent, timing and magnitude of the recent price advance in the negotiated cash fed trade—weekly average prices could temporarily challenge the $140-141 area in the new year. He said this was likely to happen in the first quarter of 2014.

Cutout prices are also advancing quickly. As of Thursday afternoon, Choice product stood at $205.17— a gain of $5.10 compared to the prior Friday—and Select gained $4.68 at $190.08. Steve Meyer and Len Steiner of the CME Daily Livestock Report pointed out early last week, however, that the negotiated cash cattle prices and product values aren’t quite lining up.

“Fed cattle averaged $132.30 last week [the week of Oct. 21-25] the highest cash slaughter cattle price on record. But a couple of other numbers are important relative to this figure. First, allowing for a 63 percent carcass-to-live weight yield, that price would be associated with a cutout value of $210/cwt. But the Choice cutout last week averaged $200.09 and the Select cutout averaged $184.13. The most recent data we have (Oct. 12) indicates that 62 percent of graded cattle were graded Choice, while 28 percent were graded Select. Using those, the weighted fed cattle cutout would be $195.12. It’s pretty obvious that that value will not square well on packers profit/loss statement when they pay $132 for cattle.”

Packers have reportedly been losing between $20-50 a head lately. Weekly production numbers have been cut to get the cutout back into profitability. However, the increasing cutout means an increased cost to consumers. The prior week had a production level of 618,000 head.

The estimate for last week was 610,000.

“There simply are not many cattle available and packers are having to chase the available supply. The critical question will be whether they can push wholesale prices up enough to restore acceptable margins—and keep consumers buying beef at those higher price levels,” said Gottschalk.

“Wholesale beef prices remain undervalued relative to pork, however, that advantage can erode quickly as beef cutout values advance toward the aforementioned levels. As we have previously stated, the risk to beef complex going forward remains on the demand side. Any slowdown in the domestic economy could quickly translate into weaker total demand.”

Diminished fuel costs continue to be a boon to beef, according to Gottschalk. Based on the difference in year-to-year fuel prices in October, he estimated a tank refill of 18 gallons of gasoline would save a consumer $5.94 per fill-up.

“That savings could purchase approximately 1.2 additional pounds of beef at current average retail beef prices. For a trucker, a 120-gallon refill of diesel would cost approximately $27.60 less than last year at this time. After eating [McDonald’s] chicken nuggets, a steak is now in the budget. What would you do; eat McDs chicken nuggets or choose a steak occasionally? Point: As long as consumers add to their beef expenditures, this market is on solid footing.”

Near-term futures last week were not as spectacular as in recent weeks. On Thursday alone, the October contract vacillated wildly, losing and gaining nearly $2 within its final day. At close with $134.50, it had gained $1.92 compared to the prior Friday. The December and February contracts moved only slightly over the week, with $132.73 (a 25 cent loss) and $134.20 (a 17 cent gain), respectively.

“Front month October contracts are under pressure Thursday as traders are adjusting holdings before contracts expire,” said Rick Kment, DTN analyst, Thursday afternoon. “Other nearby contracts are mixed in a narrow range as traders remain comfortable straddling the market until after the first of the month.”

Feeder cattle

“Yearling offerings are almost non-existent,” reported Gottschalk. He called weakness in the calf market seasonal and expected it to be short-lived, given supply constraints.

“Demand for wheat pasture grazing will add an additional positive demand component to the limited supply. Additional heifer withholding for breeding is likely, which may further limit the availability of placements in the coming months.”

Sales last week showed this to be true; there were few yearlings offered and many calves were quoted down. Many of the medium and large 1 class (#1) cattle in the 700-pound range were calves.

Colorado: At the La Junta Livestock Commission Company, Inc., over 3,000 receipts were noted. Steer calves were down $5-8 with one narrow weight category being the exception. Heifer calves were up or down $2 with preference going to heavier heifers. Yearlings were few and far between, but called steady.

Kansas: In Dodge City’s Winter Livestock Feeder Cattle Auction, over 3,200 head sold. Heifers were firm to up $2 and calves of both sexes sold steady. Yearling steers were scarce but generated a lot of buyer activity. Mostly calves were in the #1 class in the 700s, and they sold between $159.80-163.67.

Montana: The Public Auction Yards of Billings saw just under 1,900 head sold. Light stocker steers sold steady to up $3 while heavier ones sold down $6-8. Feeder steers were too lightly tested for a trend. The majority of the offering was composed of slaughter cows, which were steady to down $3.

Nebraska: Kearney’s Huss Platte Valley Auction sold over 2,500 head with few comparable sales to mention. The sale noted that some stocker/feeder heifers were being sought as replacements with some active bidding. True yearling #1 steers sold in the mid $170s and same-weight steer calves sold between $164-171.50.

New Mexico: At the Clovis Livestock Auction, roughly 4,000 receipts were estimated. Feeder steers and calves were called steady to up $3 with heifers steady. There were very few true yearlings and the only mid- 700 pound #1 steers were calves which went for $154.25-158.

Oklahoma: In the Oklahoma sales, many thousand head of cattle sold. Demand was called good and trading active. Yearlings saw good demand and heavier or value-added calves were steady to up $5, while light or truckweaned calves were discounted as much as $7. True yearling steers fetched prices in the high-$160s to low- $170s, while calves were in the mid- to high-$150s.

Washington: The Stockland Livestock Auction of Davenport had 1,350 receipts last week. Stocker and feeder steers sold steady to up $4. Slaughter cows made up the majority of the offering.

Wyoming: The Torrington Livestock Commission Co. sold over 4,200 head with calves of both sexes selling steady to up $3. Yearlings were too few to set a trend, but the handful of true yearling mid-700 pound #1 steers sold for $171.50.

Feeder cattle futures were deflated last week compared to their prior-Friday close. By Thursday afternoon last week, October closed the day and the contract with $165.33, a 22 cent loss for the week. The other near-term contracts of November and January lost significantly over last week. The November contract closed Thursday with $164.38, a $2.27 decline, and the January contract lost $2.37 with a $163.68 close.

Kment attributed the losses and the non-direction of the feeder futures to continued uncertainty in other parts of the market, as well as the “tightly grouped” nature of the futures.

Inactivity in the corn world is also a potential factor. Gottschalk called the grain complex boring and pointed out that the market is still waiting on more harvest to be completed. As of the Oct. 27 Crop Progress report, only 59 percent of the corn harvest is finished. As more of the harvest comes in, more activity might occur.

“Trade talk now is for a corn yield approaching 162 bpa and soybeans at 42 bpa,” reported Gottschalk. “On a positive note, U.S. corn in the forward market is now competitive with corn from the Ukraine and South America. A South Korean importer purchased U.S. corn for import for the first time in 16 months as a result of favorable U.S. offerings.” — Kerry Halladay, WLJ Editor