Beef demand poised for problems
Cash fed cattle trade again returned to the “leave it ‘til Friday” approach last week. Analyst expectations were mixed on if the week’s trade would be steady/higher, steady/lower, or just plain steady. By Thursday afternoon, light trade had developed for live cattle at $131 in the South Plains, but the representativeness of the volume was hard to tell. The prior week saw live prices in the South Plains at $132 and Corn Belt dressed trade at $207 to $208.
However, even with the potential of a lower cash trade, Andrew Gottschalk of Hedgers Edge said it won’t last.
Troy Vetterkind of Vetterkind Cattle Brokerage hung his projections of steady/lower markets on the situation with packers.
“Beef packers have some cattle inventory around them both in the cash market and in committed cattle, which will allow them to be less aggressive in the negotiated cash trade this week,” he said early in the week. “They don’t have to chase cattle this week as they have in previous weeks because much of the domestic beef business is caught up going into the week of Thanksgiving.”
Packer claims of decreased weekly kills going forward also are playing a part in the potential for cash weakness. They might have fewer cattle around them, but if they are also cutting production rates, they won’t need as many cattle. The prior week’s production rate was 624,000 head, a surprise to the industry that had expected far lower production. Last week’s estimated production was 618,000 head.
Another element that could depress cash trade, both last week and in the immediate future, is the amount of beef inventory that is not moving as quickly as packers would like.
“Boxed beef markets continued under a degree of pressure yesterday as packers look to clear inventory that in instances is becoming hard to move,” said Vetterkind Thursday. “Many sub-primal cuts out of the chuck and round primal were beginning to show some availability and, as a result, packers began lowering offering prices on said cuts.”
He did note, however, that the discounts on many cuts were attracting buyer interest in what is otherwise a “hand-to-mouth” procurement strategy for beef. Also there is some continued interest and higher pricing on choice rib cuts and tenderloins to deliver for the holidays. That said, beef will lose some ground to turkey in the coming weeks.
“It is turkey time so some seasonal weakness in beef is expected,” said Gottschalk. “We expect beef to post another advance from late November into December.”
Steve Meyer and Len Steiner of CME’s Daily Livestock Report observed that the setting is ripe for beef to lose market share in the future, particularly as corn prices decline.
“All three of these competing species [chicken, pork and turkey] are expected to gain some significant advantages over beef in the next few years. Lower cattle numbers are almost certain to push retail beef prices to new records at the same time that good U.S. corn and soybean crops have reduced costs in the pork, chicken and turkey sectors dramatically. The potential is there for all three of the other species to allow their relative prices to fall to new record lows while still seeing very handsome profit levels. …The change is important because people are creatures of habit. We buy many things because we are accustomed to buying them and we change only when something major—such as a significant change in relative cost— causes us to reconsider those habitual purchases. The chicken industry may still find itself in a position to change habitual behavior and gain an advantage.”
One of Gottschalk’s favorite admonishments of late is that demand for beef is the largest threat to the cattle and beef world. Increases in feeder and fed cattle costs will drive packers to try to increase the cutout values through reductions to weekly kill counts.
This, in turn, would mean more expensive beef for consumers down the road. If that happens while competition is less expensive for the consumer, interest in beef could decline.
At least for the moment the Choice cutout value has run into resistance. Compared to the prior-Friday close of $204.60, Thursday afternoon saw it at $203.99, a 61-cent decline. Select on the other hand gained $1.03 with $190.17.
“Product values have stalled temporarily at price resistance for the choice cutout at $206,” said Gottschalk.
“The next level of resistance is at $213. That objective is likely if fed cattle prices penetrate resistance at $136.” He projected support should develop at $198 to $200.
A number of other outside market impacts are playing a roll on consumer demand. The upcoming Thanksgiving holiday of course has consumers with turkey on the brain, but also important are government activities and fuel.
“The impact of the reduction in SNAP payments has yet to be determined as payments are staggered throughout the month and vary by state,” said Gottschalk, speaking of the Nov. 1 declines in food stamp (SNAP) benefits.
“Offsetting this loss to food stamp recipients is the decline in gasoline and diesel prices. The benefits to all consumers from lower Y/Y fuel prices significantly outweighs the loss in SNAP payments.”
He reported later last week that 35 cities were reporting average “regular grade” fuel prices below $3 per gallon.
“The largest gap in Y/Y fuel price declines is likely to occur during the first quarter. Be reminded that first quarter fuel prices last year increased rapidly. That situation is unlikely to occur this year.”
Live cattle futures, which have been called overbought, saw some slight movement on either side last week as the “Goldman Roll” begins for the December contract. The December contract lost 40 cents with a Thursday close of $131.68 and the February contract increased all of 7 cents over the week with a close of $133.55.
“Don’t be surprised if we don’t go down and trade the May to Oct retracement levels at $130.00,” said Vetterkind, speaking of the December contract. “Unless the funds want to defend their long position in cattle, which right now it seems they are liquidating a little, I feel December cattle are going to have a hard time at overhead resistance of $133 to $134, with near term downside targets still in play at $131.50 and below that $130.”
“Wheat pasture demand propelled calf prices steady to higher,” said Gottschalk of the feeder cash market. “As corn harvest winds down, additional Corn Belt demand will likely push feeder and calf prices to higher levels.”
Higher prices and tighter supplies of certain classes of cattle were certainly evident last week. Most of the offerings in the medium and large 1 class (#1) were calves, and yearlings of that category were few and far between.
Colorado: The La Junta Livestock Commission Company saw a decent number of receipts last week at 2,089. Most steer and heifer calves sold steady with the exception of heavier calves which fetched $2 to $3 more. Yearling feeders were too light for a trend quote. A package of 790-pound #1 steer calves sold for $153, while a lot of 755-pound #1 yearling steers sold for $159.25.
Iowa: At the IA Feeder Cattle Auction in Broomfield, 1,372 head sold. No trend was quoted though trade was called active on very good demand. Mid-700s #1 steer calves were going for $166 while yearlings were going for $168.50 to $169.50.
Nebraska: At the Bassett Livestock Auction there were over 3,400 receipts. Steers traded steady to up $5 with heifers trading steady. Demand was called good with good buyer activity. There were good prices for mid-700s #1 steers; 150 head of 718-pound steers went for $181.59.
Oklahoma: In the big Oklahoma sales, yearling feeder sales were steady to firm on limited volume. Calves on the other hand saw ready buyers depending on weight and quality. Steer calves ran the gamut of up $1 to $7 with preference going for long-weaned and/or preconditioned calves. Light heifer calves were down $1 to $7 while those over 500 pounds sold at the same prices as steer calves. Mid-700s #1 steers sold for the upper mid-$160s and steer calves sold in the high-$150s.
Texas: The Amarillo Livestock Auction saw 752 receipts on this heavily feeder offering. Despite this, there were too few feeder steers or calves sold to quote a trend. Heifers were called steady to up $2. The few #1 steers in the 700-pound range that sold were calves and went for $146.25 to $154.13 depending on weight and quality.
Washington: Almost 2,000 head sold at the Stockland Livestock Auction of Davenport. Stocker and feeder cattle were called steady to up $6 on very active trade and good demand. The feeder offering made up just over half of total offering. Those receipts falling in the mid-700 pound #1 steer category quoted prices running from $131 to $143, though there was no indication of whether these were calves or yearlings.
Wyoming: The Torrington Livestock Commission Co. saw receipts skyrocket to 6,800, compared with the prior week’s sale of 4,275, and 2,600 the same week last year. Light steer calves sold up $8 to $10 while heavier steer calves were steady to up $2. Heifer calves along the same weight breakdown were up $2 to $6 and steady respectively. There were few comparable sales on yearlings, but overall they were called steady when they existed. The few yearling #1 steers that sold in the 700-pound range fetched $171 to $173.50.
Feeder futures, called oversold, saw increases last week.
Compared to their prior-Friday closes, The November feeder contract gained $1.13 with a close of $164.63 and the January contract gained $1.65 with $165.13.
“Feeders had recently become oversold technically on the recent break in the market and in the process found themselves about a dollar discount to the current CME cash index basis Monday’s settlements, so to see them rally yesterday shouldn’t have been unexpected,” said Vetterkind Wednesday.
“The fact that feeder’s trade with lighter daily volumes than live cattle likely represents the reason they settled with triple-digit gains compared to mostly steady settlements in the live pit. And granted we are on a $7 break off recent highs in the feeder futures so I am sure we found a few value buyers in yesterday’s trade. That said, we are right back up against near term resistance levels at $165 to $166 basis the January contract so we’ll see what we can do with that.” — Kerry Halladay, WLJ Editor