Futures creep back after break

Markets
Nov 29, 2013

Initial expectations for last week were for a steady cash trade with the prior week’s $130-132 live and $206-208 dressed trade. Given that last week was a short week for buying, and packers were buying for not only a full production week, but a full production week with the expectation of increased kills ahead of the pre- Christmas demand, prices were more in the hands of cattle feeders.

The prior week’s production rate was established as 623,000 head, well above the expected 610,000 head. Last week, with its short production run, was expected to hit 565,000 head at best. Production this week and going forward, however, will likely increase to more “normal” levels for this time of year.

“They will likely ramp up production for a week or two in order to get cattle killed for the beef orders they have to cover for the upcoming end of year holiday season,” opined Troy Vetterkind of Vetterkind Cattle Brokerage. “I think this could end up being positive for the cash fed cattle market this week, next week, and possibly the week after, at which time the market likely slows down and drifts lower again going through the Christmas/New Year holidays.”

By Wednesday afternoon, a light trade had taken place relative to the short-buy/full-kill combination. At just over 21,000 head sold in cash trade for the week, Friday clean-up trade looked likely. Wednesday’s prices were generally up an average of $2 on all fronts, with live cattle trading $132-134 and dressed selling $209-210.

After the prior week’s break, last week saw live cattle futures flirt with a renewed upward trend. On Tuesday alone, near-term contracts surged about $1. Compared with the prior- Friday settlements, the December contract gained $1.62 with a Wednesday settle of $133.10. Similarly, the February contract gained $2.30 with a Wednesday settle of $134.10.

“We haven’t done much but come right back into our first levels of overhead resistance at $133 basis in the February live cattle contract, so we’ll see what we can do with that,” Vetterkind pointed out.

“Going to assume right now that $133-$134 is going to be a tough area for February live to get through unless the cash market really gets strong. So this is the area you probably want to sell risking new high closes above $135.”

However, he was skeptical on the potential of the cash market gaining too much strength.

“Any near term strength in the cash cattle and beef markets is likely to be just that— near term—as the market will slow again as we get closer to Christmas and New Year’s. Money wise, the funds still hold a huge long position in the cattle futures trade that could get trimmed towards the end of the year to make the books look good. This is why I think, at least right now, rallies in the cattle futures could fall short of expectations until after the first of January.”

Darrell Peel, Livestock Marketing Specialist for the Oklahoma State University Extension, was of a similar opinion.

“I expect cattle and beef markets to move mostly sideways for the remainder of the year, though boxed beef could rebound slightly in early December.”

Product values advanced nicely last week. Compared to the prior-Friday close, the USDA-estimated value for Choice rose $3.63 to a Wednesday close of $202.55, with Select climbing $3.38 with a close of $190.20.

The gains to the cutout rested largely on the recent reduced weekly production rates and increased demand— and prices—for some cuts. Choice ribs and tenderloins saw gains in value as retailers stock up in preparation for the Christmas season demand. Ground formulations and boneless beef were also higher last week. And finally, the often-ignored hide/offal component saw record gains, which also added to the overall carcass value.

As always, a number of outside market influences have been having some effects on the world of beef demand.

“Wholesale beef prices remain undervalued relative to pork,” reported Andrew Gottschalk of Hedgers Edge. “Pork sales are soft as the reduction in SNAP payments is impacting pork sales more than beef or chicken. Retail beef margins remain positive and will extend beef features during the holiday period.”

He also pointed out that demand for beef has been the greatest beneficiary of the recent sharp declines in fuel costs. Recent agreements reached with Iran may also reduce tensions and precipitate increased drops in the price of crude oil.

One concerning thing on the horizon that could have a negative impact on discretionary funds, and thereby beef purchasing, is the looming uncertainty of the Affordable Care Act.

“The impact of ‘Obamacare’ on individuals has yet to be realized. If news reports are correct, consumers will have less to spend as health insurance premiums increase,” said Gottschalk.

Feeder cattle

“Feeder cattle markets, after an impressive counterseasonal run this fall, appeared to take a bit of a break before Thanksgiving,” noted Peel.

He also pointed out that most of the cash feeder market complex is holding steady with the exception of some continued gains for light stock. Calves and lightweight stockers (steers) are in demand for grazing, and heifers are still being sought theoretically for breeding.

Last week’s sales were frequently light on offerings due to both the Thanksgiving holiday and the incoming of wet, cold weather in many areas. The availability of medium and large 1 (#1) class cattle was tight and mostly limited to calves rather than yearlings.

Colorado: At the Winter Livestock Inc. of La Junta, just under 750 receipts were collected compared to past week’s, which numbered in the thousands. The Thanksgiving holiday kept offers light so trends were hard to quote, though a steady undertone was noted on feeders. Seventy head of 738-pound #1 yearling steers sold for $167.

Iowa: In the Russell Feeder Cattle Auction, just under 2,400 receipts were collected. Feeder steers over 600 pounds were down $3-5, but lighter steers were up $2-4. The same was true of heifers, but with the turning point weight being 400 pounds. Trade and demand called active. Over 110 head of #1 yearling steers in the mid-700s sold solidly in the $167 range.

Nebraska: The Tri-State Livestock Auction of McCook sold 850 head, which was not enough to set a trend, given a lack of comparable sales. Demand was called good, however. Nine head of 722-pound #1 steer calves sold for $153.83.

New Mexico: At the Cattleman’s Livestock Auction, 1,850 receipts were collected. Feeders were called down $4- 6 with the majority of the feeder offering being of the medium and large 1-2 class. The few #1 yearling steers that sold fetched relatively low prices at $147.50-152.88.

Oklahoma: The Oklahoma National Stockyards saw a very small offering last week ahead of the Thanksgiving holiday and some poor weather in the area. No trend was quoted but demand was called moderate to good for the offering. A small batch of true yearling #1 steers weighing 715 pounds sold for $167.

South Dakota: The Philip Livestock Auction saw just over 3,400 receipts last week. Steer calves under 450 pounds sold up $12 with price increases declining with increasing weights. Steers between 600-650 were steady and over that weight were down $4. Heifers saw a similar price-to-weight trend, with light weight heifers going for up $4-6 and heavier ones down $4. A handful of 701-pound #1 steer calves sold for $169.

Washington: The Stockland Livestock Auction of Davenport collected 715 receipts, light compared to the 2,475 of the prior week. As the offering was too light, no trends were offered, though trade was called active on good demand. Slaughter cows made up 62 percent of the offering and were called steady at $67-71 for average Breaker cows. There were no #1 steers quoted.

Wyoming: The Riverton Livestock Auction collected 2,611 receipts, up from both the prior sale and the same sale last year. Feeder calves made up the majority of the offering and were said to be unevenly steady with lower undertones noted. #1 Feeder steer calves on the light end of the 700 range sold for $154- 158, while those on the heavier end sold for $147-148.50.

Feeder futures saw the end of the November contract, which left the board last week. Its last traded day was Nov. 22, where it settled at $164.85. The new nearest near-term contracts of January and March saw strong, steady gains. January gained $1.83 compared to the prior-Friday close with a Wednesday settle of $165.33. March similarly gained $1.77 with a settle of $165.15.

The two contracts continued to be locked in a close range, though it is likely they will widen to a more normal level as the market progresses, fed cattle pick up some strength, and continued tight supplies make themselves more known.

Cold Storage

The most recent Cold Storage report was released last week, documenting the total stores of meat and poultry in storage around the country as of Oct. 31. As is usual, chicken represented the largest portion of the combined proteins in storage at 32.3 percent of the total. This was up from the same time last year when chicken represented 30.1 percent of total stored proteins.

Meyer and Steiner noted that projected upticks in output for chicken could exacerbate the current high stores of chicken.

Next by proportional representation was pork, which represented 26 percent of the total stored meats. This was down compared to the same time last year when pork made up 27.8 percent of meat in cold storage. This reduction was expected given the current shortcomings of pork production.

Beef and turkey basically swapped their representations in the meat lockers. On Oct. 31, 2012, beef made up 19.9 percent of total stored meat, while turkey made up 20.9 percent. This year however, beef represented 20.4 percent of the total stored meat, while turkey’s proportion fell to 19.9 percent. Stores of less common meats, such as lamb, mutton, veal and duck, remained steady across both years and among the differing meat types. — Kerry Halladay, WLJ Editor

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