Production cuts could boost prices

Dec 30, 2013

The cash fed trade was choppy last week, given the Christmas holiday being smack dab in the middle of the trading week. Analysts expected cattle to sell steady to $1-2 higher than the prior week’s $129-130 live and $205-209 dressed in late-week trade. By Thursday afternoon, little had changed and only slightly more than 3,000 head had traded hands for $210 dressed.

Small showlists ahead of another week of shortened holiday production caused this expectation for steady to higher cash trade.

“Product movement at retail during the holiday period will be critical if prices are to advance as we expect post-New Year. Shortened holiday production schedules could lead to a rapid rebound in cash cattle and product prices if product continues to move well,” noted Andrew Gottschalk of Hedgers Edge.

Last week’s production rate was estimated at 485,000 head with this week’s projected to be 510,000 head at best. The prior week’s numbers had been revised to 613,000 head, down from estimates of 615,000- 620,000. That week was the second week that saw industry expectations disappointed.

Gottschalk projected that the two consecutive holiday weeks with their sharply reduced production should allow product prices to make a significant advance post-New Year.

“Product values should gain momentum from two consecutive short production weeks. Product should post a strong gain into mid-January. A retest of the $206 level is likely.”

Troy Vetterkind of Vetterkind Cattle Brokerage was less enthusiastic, however.

“While middle meats will have more value to lose in the coming weeks, some renewed interest in end meats may help to stem some of the losses in cutouts near term. That said though, once buyers get their first of January needs covered I would expect boxed beef values to drift lower again and I’m not so sure we don’t go down and print a lower $190s type of Choice cutout before we get cheap enough to generate some lasting business.”

Time will tell which projection is accurate. For the time being, product values did indeed advance last week, but likely not as much as might have been hoped. Over the course of the week the Choice cutout advanced only 14 cents to $196.93. Select, on the other hand, gained more readily with $190.46, a gain of $2.03 over the prior Friday.

“I would assume the friendly placement number in Friday’s Cattle on Feed report will help to support the futures market today and tomorrow or at least help to keep it from collapsing,” opined Vetterkind last Monday. And right he was; near-term live cattle futures gained slightly, but nothing spectacular.

From the prior Friday to last Thursday afternoon, the three nearest live contracts gained the equivalent of pocket change. The December contract, which will be leaving the board this week, gained 17 cents to settle Thursday at $132.70. The February contract gained 25 cents with a settle of $134.15 and the April contract gained 48 cents with $134.98.

As Vetterkind predicted, however, volumes dropped precipitously. While total volume was 47,526 on the previous Friday, by Thursday volumes had dropped to 15,074.

He pointed out that the light volumes of the market, and the fund buyers being long in the futures could make for unpredictable prices. “They can probably put futures wherever they want,” he said of the fund buyers. Despite that, he had some hopeful words for the February contract.

“It looks like Feb. live could get a test of overhead resistance at $135, which we’ll have to see what the market is made of up there.”

Domestic demand for beef has remained positive so far with consumers still willing to pay higher prices for beef. That, however, remains an area of potential weakness in the near future as beef is now in the process of losing its relative price advantage to pork.

“That said, the retail price structure favors beef versus pork,” noted Gottschalk. He also pointed out that while beef will soon be challenged by competing proteins, export demand could get a boost in the nearish future.

“On a very positive note, the likelihood of U.S. beef exports to China beginning during the second half of the year is increasing following recent statements by their government.”

China, along with Russia, all but banned beef and pork imports from the U.S. over ractopamine concerns. China has been a favored export destination for many of the world’s beef producers with countries such as Australia and Brazil gaining market share over the U.S. as a result of China’s de facto ban on U.S. beef.

Feeder cattle

Cash feeder markets were few and far between last week as most feeder cattle auctions had called it a year in the previous week. Many auctions noted that they will not begin regular sales until the first or second week in January, which means there will be little to report on this front for a couple weeks yet. The few sales that were held during the Christmas week saw medium and large 1-class yearling steers and calves sell in the mid-$160s to low-$170s. Volumes were light even in the slight handful of sales held.

This situation was not a surprising one for Vetterkind.

“Trade volumes will be very light to almost non-existent as many of the major auction markets across the country will be shut down for the next two weeks due to the holidays. That said, I would expect lighter weight calves to remain in demand for winter backgrounding programs, however many of the major cattle feeding companies are going to be out of the market for replacement feeder cattle as not only are available receipts going to be light but many have indicated that the cost of replacement cattle has gotten too high to pencil breakevens.”

Feeder futures were mixed compared to their live cattle compatriots, however the extent of their movements were very similar. January feeder futures lost 38 cents with Thursday’s close of $166.60 compared to the prior Friday’s close, and the March contract gained all of 27 cents with a close of $167.20.

“The January contract should have some problems back up at $168,” warned Vetterkind. “March feeders are probably going to test contract highs of $168.50 and there will be people talking about taking that out and making another leg higher to $175. And this could certainly be the case from a technical standpoint, but we need to keep in mind we’re going to have some feeder supply in March as cattle come off wheat pasture. But I agree if we get above $168.50 on a close the funds are going to come after it. I guess I’m still not as bullish as the rest of the world but would agree we can rally here yet. I will be looking at that rally for hedging opportunities though.”

Cold Storage

The USDA released its December Cold Storage report last week. Overall, there was 1.96 billion pounds of red meat and poultry (“meat”) in the nation’s freezers as of Nov. 30, only slightly higher than the 1.95 billion from the same time last year.

Month-to-month, the stock of meat in the nation’s freezers declined 10 percent with the Oct. 31 report showing 2.18 billion pounds in storage. Steve Meyer and Len Steiner of CME’s Daily Livestock Report said the decline between October and November was normal based on history, and opined the report was generally neutral.

Beef in cold storage increased by roughly 3 million pounds, from 441.8 million on Nov. 30, 2012, to 455 million in this report. The increase in raw numbers increased beef’s proportion of the total meat in storage only slightly, from 22.6 percent of the total in November, 2012, and 22.7 percent of the total of this past Nov. 30.

Pork lost ground year-toyear, both in actual numbers of pounds in storage and in its representation among the total meat in storage. With 546.3 million pounds of pork in storage, pork saw a decrease of 12.4 million pounds compared to the same time last year, and went from 28.6 percent of the total to 27.9 percent of the total. These losses in actual numbers were attributed to a “drawing down” on hams and other cuts for export. The loss of proportion of the total is likely due to the increase in chicken production. — Kerry Halladay, WLJ Editor