Cash fed cattle up sharply

Markets
Jan 4, 2014

Cash fed trade last week was riding the strong price tailwind from the prior week. On Friday, Dec. 27, cash cattle prices increased sharply with cattle selling $3-4 higher for live at $133-136 and $3-6 higher with $210-215—mostly $212-214—for dressed. Monday and Tuesday of last week saw similar prices on small volumes of cattle in what was likely clean-up trade.

By last Thursday afternoon, a good chunk of last week’s genuine trade—rather than clean-up trade— had occurred, but at volumes suggesting sales for Friday, as well. Live cattle brought $135-137 live in Texas, and $137-138 live and $215-218 dressed in Nebraska.

The relatively wild swings in cash prices stemmed from several things, one of them being packers’ need for cattle following such short production weeks. Last week’s production estimate ranged from 500,000-517,000 head. This week is expected to be a full production week, which recently has meant kill numbers in the 620,000-head region.

“Sounds like packers have some domestic and export beef orders to fill so they are going to need the cattle to kill to get the orders covered,” noted Troy Vetterkind, of Vetterkind Cattle Brokerage on Thursday. With a holiday smack dab in the middle of a week to purchase cattle for this week’s full production schedule, it left them with a lot of pen space to fill and not much time to fill it.

As has been mentioned in recent reports, the short production weeks of the Christmas and New Year’s holidays also had a hand in reducing available beef. Lower availability with steady to stronger demand means higher prices.

“As expected, two consecutive weeks of light production have laid the foundation for a rapid advance in the beef cutout,” affirmed Andrew Gottschalk of Hedgers Edge. “Our initial cutout objective is $206 followed by $210-$211. The advance in

product values will serve to offset some of the calculated negative operating loss for packers as they write up their inventory values.”

Packers were reportedly $85/head in the red last week.

The jump in cash cattle prices corresponded with a respectable increase in both near-term futures and cutout values. On the futures side of things, analysts warned of an approach to an overbought level, though some profit taking was seen on Tuesday ahead of the New Year’s holiday.

The December live cattle contract left the board midday on the 31st at $134.50, 65 cents higher than it had closed on the prior Friday. Over the course of the week, the February contract gained 68 cents with a Thursday close of $135.63, and the April contract gained 18 cents with $135.80.

“We had somewhat of a reversal off overhead resistance at $135.50 in Feb. live and $136 in April live and will be interesting to see if we can come back and close above those levels today or tomorrow,” said Vetterkind Thursday. “I would say that if we can’t take these important overhead levels out by tomorrow that the market could be getting a little tired up here, but need to be careful being short right now with the cash fed cattle market being so strong.”

The cutout gained nicely and is poised to move higher by all accounts. According to Gottschalk, a price rebound to challenge cutout resistance at $206 for Choice is likely by next week or the week after. For last week, Choice gained $3.56 with a Thursday close of $200.55. Select also gained nicely, closing on Thursday with $196.05, a gain of $4.75 Steve Meyer and Len Steiner of CME’s Daily Livestock Report noted that there is a decidedly hopeful demand element to this price increase. Consumer demand for beef this past year has been surprisingly resilient to the record high retail prices. In the current situation, roasting items such as round has been carrying the carcass.

“With steak items seasonally lower in January, the cutout has been sustained so far by very strong gains for round cuts. The test for the beef complex will come in mid- January, a time when retailers have filled the meat case. If consumers balk at paying higher prices for beef, retailers will not be as aggressive on their bids. And as round cuts go this time of year, so will the cutout.”

They also pointed out that the same time last year saw packers struggling with poor demand which resulted in poor cattle prices. Despite the similar conditions of purchasing for a full-production week during a shortened holiday week, diminished cattle availabilities, and orders to fill, this same week last year saw cash fed sales slow with cattle selling for $127-128 live and $202-204 dressed.

Differences, of course, lay in the extent of short cattle availabilities. While cattle were scarce this time last year, supplies are relatively tighter this year.

“Cattle numbers are expected to be limited in [the first quarter] of 2014, consistent with the cattle on feed inventories and the fact that the marketing window for summer cattle was skewed towards bringing cattle to market earlier than normal. The expectation still is that fed cattle supplies should drift lower by late January and February. Beef demand remains key, however.”

The demand element of the cattle equation got a lot of attention from analysts last week. That’s not surprising, as so much depends upon consumer demand.

“The ability to sustain beef cutout values at the aforementioned levels will be determined by the level of beef demand,” said Gottschalk. “Last week was the first week since August that our retail sources reported slow sales. The concern is that weekend sales showed no gain. Beef demand post- New Year will need to be monitored closely. Our expectation is that beef demand will remain on a positive track.”

Gottschalk and others reported that beef movement between the Christmas and New Year’s holidays was less than had been hoped, but outside market factors are well stacked to maintain strong demand for beef.

“On a positive note the U.S. economy continues to gain momentum with gains in real incomes being reported and lower energy costs. This combination is a positive potion for maintaining beef demand.”

Fuel prices continue to be lower than year-ago levels and cautiously positive comments on the state of the economy have surfaced. That said, there are still areas of uncertainty with the outside economy.

“The added cost of ACA is a hazard to consumer spending. It is named appropriately as the ‘Affordable Care Act.’ The question is: who can ‘afford’ it?” mocked Gottschalk.

Feeder cattle

As with the past few weeks, feeder cattle sales were few and far between and will likely be so for another week. Most auctions have posted notices saying they will start up again either this week or next. Those few auctions that reported sales were found in Iowa and Nebraska. The former reported on a collective Holstein steer sale, wherein there were no medium or large 1-class (#1) cattle offered. In the large 2 class, mid-700s Holstein steers sold for $134.15-137.50. Nebraska saw the paltry offering of mid-700s #1 steers sell for $169.96.

“The outlook for feeders and calves remains positive,” summarized Gottschalk. “The sharp advance in fed cattle prices last week will encourage fed cattle producers to remain active bidders. A close over $168.50 basis the spot feeder futures should establish a price target at $174-$175.

Feeder futures, however, did not reach that level last week, and, in fact, were stagnant to lower when compared to the prior Friday. With a Thursday settle of $167, the January feeder contract remained unchanged over the week, and the March contract, also at $167, lost 80 cents.

“Feeder futures remain stuck in their recent $166- $168 trading range basis the January contract and probably don’t see that changing for the balance of this week,” said Vetterkind last Thursday morning. “The March contract will be the one to watch to see if we can take out new contract highs above $168.55. If we can, it looks like another leg up in the market is to take place, which would take the March contract up to the $175 area.” — Kerry Halladay, WLJ Editor

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