Consumer attention turns to turkey

Markets
Nov 18, 2013

We returned to a late-week trade mentality for cash fed cattle. By Thursday afternoon, only 3,750 head had been sold. Expectations were for a steady/lower to steady trade.

Though things were suppressed last week, the expectation for increases in the near future exists.

“A post-Thanksgiving rally is expected for product and cash cattle values,” said Andrew Gottschalk of Hedgers Edge. That might not be a good thing in the long run, however, as cash prices and their influencing market elements—such as production rates, feeder prices and futures—threaten to push prices out of consumers’ willingness to pay.

“Given the current average retail beef price, a cash price at $136 will result in retailers raising retail beef prices or limiting beef features. Either action they choose may result in slowing consumer beef purchases. As such, any price exceeding the $136 live is expected to be short lived. A short term advance to the $140-141 level cannot be ruled out during the first quarter. The most likely is during the mid-February to mid-March period.”

He continued, saying that such a level would be short-lived and would likely be the highest price for that price cycle.

“Historically, rapid and sharp advances in fed cattle prices have served as an umbrella to allow the competing meats to ramp up their production. In the end, beef loses additional market share. History is likely to be repeated.”

Troy Vetterkind of Vetterkind Cattle Brokerage noted last Thursday that some live futures strength on Wednesday might have bumped last week’s trade from steady/lower, to a solid steady.

“The funds are in here buying the live cattle futures defending their already net long position so perhaps this works in the cattle feeders favor this week and they can hold the market steady. Without this futures strength though, the near term (i.e., 2 to 3 weeks) fundamentals suggest a market that drifts lower into the first of December before resuming the uptrend.”

That mild strength in the futures Vetterkind mentioned was not as impressive last week as has been seen in the recent past. But it was still an increase; a steady slight increase from day to day. Compared to the prior-Friday close, both December and February gained 58 cents over the week, closing Thursday with $132.98 and $134.53 respectively.

But there is more detail on futures than just the contract settlements.

“Open interest continues to climb on a combination of fund buying vs. new hedge selling and some of the long open interest rolling out of the hog market into the cattle market,” said Vetterkind.

“I would probably be a little careful being short Dec./Feb. or Dec./April live cattle in the spreads right now because we get towards the end of the month and we see some improvement in cash fed cattle prices. These spreads could make a move back to recent highs like they did in October. I would be more comfortable being short Feb./long April live cattle on a trade back to even money on ideas of softer beef demand past the holidays and any type of harsh winter weather scenario that were to develop would be more beneficial to the April cattle.”

Packers are suffering from the higher prices of fed cattle, as well as the recent turkey-related slowdown of beef movement. They lost an estimated $20-30 per head last week. In an effort to get product values back up and thereby help get them back in the black, packers have been cutting production rates. The prior week’s kill count came to 607,000 head, compared to the 618,000 head predicted. Last week had production estimates of 610,000-615,000 head.

It’s hard to tell if this couple weeks of cutting production rates has had the desired effect, given how many economic moving parts go into product values. Over the course of last week, both cutouts declined slightly; Choice lost 23 cents with a Thursday close of $202.56 and Select lost $1.22 with $188.52.

Various cuts of beef were needing discounts to move from packers’ freezers last week. Chuck and round have slowed down from their earlier cold-weather stardom as Americans turn their protein-buying attention to turkey. Ground beef has also had demand slowdown, though the supply side might take care of the demand-related discounts there, Vetterkind explained.

“Despite a 12 percent reduction in domestic cow slaughter, U.S. ground beef processors have been able to keep the domestic cow beef market in check by utilizing cold storage supplies of beef and imported beef product in their least cost formulations of ground beef. A year over year decline in foodser vice demand for ground beef and strong competition from alternatively priced chicken at retail has helped in this regard. Up until the first of October, imported beef was trading at a discount to domestic grinding beef, but domestic end users in the eastern half of the country continued to bid aggressively for imported beef as it still worked into their grind formulations compared to U.S. product.”

He continued, pointing out that, despite recent increases in shipments of beef from Australia, much of their seasonal pick up in cow slaughter will go to Asian markets. This, coupled with drought-depressed herd sizes in New Zealand and domestic activities, means grinding beef will be hard to come by. Once demand for beef picks up after Thanksgiving and going into next year, that could propel trim prices and the overall carcass value higher.

“Bottom line is U.S. grinding supplies of beef will remain tight for the foreseeable future and the supply side of the equation would suggest new highs in 90 percent cow beef above $2.35 set in early 2012,” summarized Vetterkind.

“However, demand, currency fluctuations, and competition from alternative proteins, as well as other world beef exporting countries (i.e., Brazil) will be key in determining just how high manufacturing beef prices can go next year.”

Until then, the beef industry needs domestic and export demand to help hold up values. Outside market activity mentioned in the past—decreased SNAP benefits, greatly lower year-toyear gas prices, comparative price of beef versus competing proteins, and of course “turkey day”—are playing big roles, as well.

Noting that Thanksgiving is (at printing) just two weeks away, he said, “Turkeys are dominating the retail mentality and advertising will use the birds as the draw for consumer attention. This will keep the wholesale beef prices lackluster at best and we expect them to be lower. It is a temporary pull-back, in our opinion, with the traditional post-Thanksgiving interest in beef to follow quickly.”

Feeder cattle

Cash feeder cattle were mixed last week with calves both taking the limelight and seeing some of the biggest discounts. In some cases, where calves were preconditioned and longweaned, or otherwise value added, they were nearing the prices of true yearlings. In others, bawlers and unvaccinated calves were selling for $20-30 discounts to the trends for yearlings in the past weeks.

“So much depends on the quality of the cattle,” said Vetterkind. “How long they have been weaned, what type of vaccination program they were on, what ranch they came from, and overall how they appeal to the buyer when they walk in the ring, to determine what kind of money they bring from day to day.”

With the short supply of yearlings coming to market lately, and the fact most of the really desirable yearlings have already been bought, the ranks of medium and large 1 (#1) class yearlings were light. Many #1 steer receipts were for calves.

Colorado: At the La Junta Livestock Commission Company Inc., there were 2,331 receipts with calves called uneven with preference (up $2-3) for midweight calves. Though the offering was 45 percent feeders, offerings of yearlings were too few to set a market trend. Forty head of 702-pound #1 steer calves sold for $153.65.

Kansas: In the Winter Livestock Feeder Cattle Auction of Dodge City, over 4,500 head sold. Despite the high numbers, true yearlings were too few for a comparison, though an “extremely higher undertone” was reported. Calves were steady to firm with discounts given on short- or truck-weaned calves. Numerous batches of mid-700s #1 steers were sold. Yearlings were mostly in the low $170s and calves varied depending on flesh level, ranging from $157.25-164.

Nebraska: The Bassett Livestock Auction saw 3,375 receipts with strong demand. Steers were steady to up $6, while heifers were up $5-12. About 80 head of #1 yearling steers sold from $169.62-179.75. Elsewhere, at the Huss Platte Valley Auction, 3,400 receipts were recorded with uneven prices for feeders. Steer calves over 600 pounds sold steady to up $5. Most calves were noted to have some preconditioning and about half were properly weaned. Mid-700s #1 steer calves ran the gamut of $151.98-171.58 depending on quality, and yearlings were decidedly in the low- to mid-$170s.

Oklahoma: The Oklahoma National Stockyards saw some spectacular volume with 10,621 receipts.

Both yearling and calf feeders were called steady. Calves made up most of the mid-700s #1 steer receipts, with prices ranging from $151-160.62. Yearlings in that class fetched mid- to upper-$160s. In the El Reno sale, yearlings were steady to up $1, while calves were up $3-5, though it was noted there was a heavy supply of reputation and long-weaned calves. Calves went for $148-156.27 and yearlings went for mostly mid- to upper-160s, with a group of fancy yearlings going for $174.50.

Feeder futures were right there with live cattle futures in terms of weekly gains. Compared to the prior-Friday closes, the November feeder contract gained 60 cents with a close of $165.03 and the January contract closed with $165.20, a gain of 77 cents.

“We should expect to see some increased price volatility in the CME feeder index given the majority of the cattle calculated into the index are spring born calves,” advised Vetterkind. — Kerry Halladay, WLJ Editor

{rating_box}