Futures break on fund liquidation

Markets
Nov 25, 2013

Cash fed cattle trade was in a “wait and see” mode last week ahead of the release of the Nov. 1 Cattle on Feed report and the drastic downward movement of the futures market. By Thursday afternoon, light trade amounting to over 11,000 head for the week had sold at $130-131 live in the South Plains and $132 live and $208 dressed in the Corn Belt. Though the volumes were too low to set a definitive trend, analysts speculated the numbers would set a steady/weaker trade once the week was over.

Despite the factors for potential weakness in the cash trade, there were other forces at play, as well. What prices might have done without these influences is hard to say.

“With already curtailed production schedules in place, given poor processing margins and a short kill week ahead due to Thanksgiving, as well as the continued slide in futures, it looks like the packer will get his way this week,” said Troy Vetterkind of Vetterkind Cattle Brokerage last Thursday. He anticipated trade would develop at $130-131 live and $204- 206 dressed.

Feedlots lowered their asking prices for fed cattle mid-week following the break in the live futures market. Over the course of the week compared to the prior-Friday close, the December contract lost $1.95 with a Thursday settle of $131.45. The February contract lost $2.45 with a Thursday close of $132.35. Week lows were $130.65 and $131.27, respectively.

“The cattle futures market slid another notch lower yesterday on fund liquidation.

The market broke technical support yesterday, which switched some trend following accounts from buy to sell.” said Vetterkind last Wednesday, speaking of the break seen on Tuesday.

Vetterkind warned that hedgers need to take note of the activities of fund buyers, as well as the “bloated” nature of current open interest, saying that if sell signals kick in, fund buyers might sell rapidly. “We need to be careful here because as we saw early this year, it doesn’t matter what the fundamentals are or how tight cattle supplies are, if they want out they get out.”

Andrew Gottschalk of Hedgers Edge also voiced caution on the topic.

“The high level of open interest fostered by funny money committed to the long side of this market is concerning,” he said. “Open interest exceeding 335,000 contracts is approaching previous record levels.”

Some fund liquidation did occur, prompting Gottschalk to warn that the live futures are approaching oversold levels. There seems to be more room for continued fund liquidation, however. “Should funny money decide to exit their long positions, the market will take on a mind of its own independent of supply/ demand considerations,” cautioned Gottschalk.

“We have done some technical damage to the charts, which likely keeps some sell pressure hanging over the market near term,” said Vetterkind of the liquidation.

“That said though, a stabilization in cash beef markets due to better export business and a resumption of domestic beef business going into the month of December should keep the market from falling out of bed.”

Export news has indeed been good of late.

“Export sales increased substantially last week as well, all of which along with the lighter weekly kills should allow packers to stabilize the boxed beef trade next week and the week after,” said Vetterkind last Thursday. “As a result I would probably look for cutout values to begin moving back higher again going into the first of December.”

Production for the prior week was recorded at 599,000 head, compared to that week’s expectation of a 610,000- 615,000 head production week. This was the third week that saw rather substantial differences between the industry estimate and the actual number. Last week’s estimate was for a production rate of 610,000 head.

“Total cattle slaughter for the week [beginning Nov. 11] was estimated at 599,000 head, down 1.3 percent from the previous week and 4.4 percent lower than the previous year,” reported Steve Meyer and Len Steiner of CME’s Daily Livestock Report. “The year over year declines continue to be driven in large part by fewer beef cows coming to market. We estimate cow and bull slaughter for that week at 138,000 head, down 11 percent from a year ago. Fed cattle slaughter is estimated at 461,000 head, down 2.6 percent compared to last year.”

As the last full week preceding the week of Thanksgiving, last week’s beef markets were still laboring under the shadow of turkey in the domestic market. There were some signs that retailers are preparing for the expected post-Thanksgiving surge in beef demand, as roasting cuts and strip loins saw some value increase. Ground beef formulations also saw a nice value spike, theoretically due to fast food groups preparing for consumers’ projected increased interest in beef.

Product values declined last week, with Choice losing $2.58 with a Thursday close of $198.58 and Select shedding $2.01 with a close of $186.43.

Feeder cattle

The cash feeder cattle markets had a steady/lower tone last week, “but not as low as one would think given the weakness on the futures board,” qualified Vetterkind. “Tight supplies and good demand, especially for lightweight calves to go on Central Plains wheat pasture, continues to support the market.”

There was indeed some softness in the feeder markets, but mid-$170s prices were still to be found. Few sales reported on yearlings in the medium and large 1 (#1) class, but calves of the same category were common. Demand for heifers was fairly strong.

Colorado: At the Sterling Livestock Commission Company, 1,804 receipts were collected. Feeder steers were mostly down $7-10. The exception was steer calves around 600-650 pounds which sold steady. Heifers were steady on yearlings and down $1-5 on calves. At the La Junta Livestock Commission Co., they saw similar numbers of receipts. Steer calves were steady to up $1, and light heifer calves were up $1-3 though heavier heifer calves were down $2-3. Yearling steers were up $3-5 with heifers steady to up $2. A load of #1 calves weighing between 715-740 pounds sold between $161-163, while a batch of 770-pound calves went for $157.

Iowa: The Bloomfield Feeder Cattle Auction saw over 1,400 receipts. No trends were offered on the mostly grass yearlings since the prior sale was mostly calves. Trade was called active on very good demand, however. Yearling #1 steers went for $165.65-170.31.

Kansas: At the Winter Livestock Feeder Cattle Auction, well over 5,000 receipts were collected, far beyond the prior week’s sale volume. Yearling feeder steers were up $1-3 on a limited test, with too few yearling heifers for a quote. Calves of both sexes were called firm with higher undertones noted. Yearling #1 steers sold in the mid- $170s, calves in the mid- $160s, and fleshy yearlings were in the mid- to low-$150s.

Nebraska: The Huss Platte Valley Auction collected 3,600 receipts and saw continued active demand for light steer calves, which sold up $5-7. Heifers were steady to up $4. It was noted that, while buyers were selective about preconditioned steer calves, heifer buying was simply about procuring heifers.

Prices for #1 yearling and steer calves weren’t as differentiated as in other locations with both fetching mid- $160s, while fleshy animals were down in the upper- $150s.

Oklahoma: In El Reno, nearly 6,500 receipts were collected. Yearling steers sold steady to $2 lower with preference for heavier animals, and heifers were down $2-3. Calves were steady. Yearling #1 steers in the 700-pound range were decidedly selling in the mid-$160s, with calves and fleshy offerings fetching low- to mid-$150 prices. At the same time, the Union Livestock Market of McAlester sold over 2,600 head, with steer calves selling at spectacular gains of $5-14. Peewee heifer calves were down $3-12, but midweight and heavier heifer calves were up $3-8.

South Dakota: At the Hub City Livestock Auction, a whopping 7,145 receipts were collected. Steers saw a strange roller coaster effect in their prices based on weight, ranging from down $6 to up $5. Heifers saw similar weight/price trends, though the prices were depressed in all categories compared to steers. #1 Steers in the 700-pound range, both calves and yearlings, sold between $165-172.

Wyoming: At the Torrington Livestock Commission Co. close to 6,000 receipts were collected. Both steers and heifers, yearlings and calves, were up $2-3 where comparisons existed, with the exception of yearling heifers over 750 pounds, which were steady to up $2. Demand was called good with active trade. A collection of #1 steer calves weighing 730-745 pounds sold for $170-174.75.

Near-term feeder futures contracts declined right along with the live cattle futures. The November contract lost 35 cents with a Thursday close of $164.80 and the January contract lost $2.45 with a settle of $163.38. This was one of the first times in recent memory that the two contracts weren’t neck and neck with each other.

“Typically, at any point during the year, the spread between all [feeder futures] contracts is roughly $5 per hundredweight,” explained John Michael Riley, Extension Economist of Mississippi State University. “Currently, the spread is near the lows from 1995 through 2012 at about $2 per hundredweight. So, what does this mean?” Riley supplied the possible answer of declining corn.

“This appears to have led to larger increase for nearby feeder prices while more deferred contracts wait to see what next year’s crop looks like. Even so, in the winter and spring of this year the most deferred contract was at a significant premium to the nearby contract. This was not surprising at the time, given the expectation of tight feeder supplies moving forward.

While this is still the case, for the most part, the fact that the spread has narrowed is indication of the uncertainty of future feeder cattle demand since there is not a ‘time’ premium currently in place.” — Kerry Halladay, WLJ Editor

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