Markets keep heading up; sky's the limit?

Markets
Jan 27, 2014

Up, up, up it goes. Where it stops, nobody knows!

The cash fed cattle trade continued its upward momentum with a vengeance last week as Wednesday saw over 20,000 head sell on that day alone, and at prices $5-6 higher live and $11-13 higher dressed than the prior week’s cash prices. Which, at $141-144 live and $126-129 dressed, were nothing to sneeze at to be sure.

“I thought pot was only legal in Colorado; who smoked the dope?” asked Andrew Gottschalk incredulously on Thursday morning, following Wednesday’s spectacular price movements. He likened the action to similar patterns in October of 2003.

“Almost as quickly as it developed, it disappeared. Cinch up tight in the saddle, this ride may not be over but this week’s trade action should be viewed with extreme caution,” he warned.

“Fierce competition amongst the major packers to procure the right grading cattle to fill nearby beef orders continues to propel the market sharply higher,” explained Troy Vetterkind of Vetterkind Cattle Brokerage. “Assume the #1 packer is carrying a pretty big stick and has coverage on the board and is out in front of every one else bidding up the right kind of cattle to get them bought and is making the competition fight for their market share.”

By Thursday afternoon, almost 100,000 head had been confirmed sold at prices even higher than Wednesday’s. The average allgrades live price for steers was $147.47 and $239.86 for dressed.

The question of when the price explosion would end is, of course, tops on everyone’s minds. Vetterkind opined that this week might begin to see the cooling of the cash fed market as packers get their nearby beef orders filled, but acknowledged that it’s difficult to predict.

By Thursday afternoon, the Choice cutout value had declined slightly from that high to $238.55, a $6.84 increase over the prior Friday’s close of $231.71. Select also advanced over last week with a Thursday close of $236.93, a $7.61 gain.

“The rally has caught even the most bullish market participants by surprise and just about everyone we have spoken to seems to think that the market is overdone and it will not be able to sustain these gains,” commented Steve Meyer and Len Steiner of the CME Daily Livestock Report.

“And this in itself is part of the problem. Beef buyers were caught flat-footed in this market and, when you don’t believe the rally, you tend to wait and hope for the break. What that does is that, in the short term, it tends to further fuel the spike. If last week you had to buy one load and you waited, this week you have to buy two and are even more desperate than the week before.”

“We think this is a classic case of inelastic demand meeting a shrinking supply, with a dose of short covering panic thrown in for good measure,” they said later in the week of the potential whys behind the moves.

“We think demand is inelastic in the short term because this is the time of year when retailers tend to transition from holiday items, such as hams, turkeys and rib roasts, to more normal fare.

There is also the tendency to plan based on last year’s performance and retailers remembered when beef prices dropped sharply between January and March of 2013.”

The downside with being in high places is, well, the down side. While enumerating the greatness of the prices and the wish that they continue, Gottschalk continued with his warnings on Thursday.

“The risk, however, is not on the supply side; it is on the demand side. Retail prices only reflect a maximum cutout at $206; yesterday’s closing level was $240.05. Retailers are expected to raise prices promptly and sharply to restore their margins.”

So far—fingers crossed— consumer demand hasn’t flagged.

“Product markets have not stalled,” noted Gottschalk. “Everyone thinks they can; they should; they will. Now we just need to know at what level.”

Vetterkind also commented on the hopeful quietness of consumer reaction to increased beef prices last Wednesday.

“Still haven’t seen or heard of much consumer backlash to beef prices as the retail community seems to be keeping prices offered to the consumer in check by giving up some of their margin.”

According to the most recent Oklahoma Food Demand Survey, consumers surveyed in the first half of January indicated they are more willing than in December to pay higher prices for beef items. Respondents also said they planned to buy less beef in the coming months, but interestingly they said they planned to buy even less pork in the coming months, as well as declining willingness to spend their protein dollars on pork items.

One of the elements that may be playing into the continued strong demand for beef items is sports.

“The charge higher continues to be led by end meats and ground beef, with ground beef a very strong performer ahead of the Super Bowl,” noted Vetterkind.

“There is a lot of concern about how sustainable this sharp jump in beef prices can be, but my understanding is a portion of the beef buying community remains short bought and those needing to do business have to do so at packer offering prices.”

Challenging weather in the Eastern states has posed an opposite demand force in those markets, but for now the effect hasn’t been serious enough to move the overall price complex.

Along with other record market things, packer margins did a break-neck 180 degree turn-around on their margins. While the beginning of the prior week saw packer margins hovering around $20 per head losses, the beginning of last week saw them in the black, well over $100 per head. By last Thursday the estimate was that packers were making $127 per head. With continued expectations of below 600,000-head production weeks for last, this, and the coming weeks, the potential for continued profitability exists.

Last, but not least, live cattle futures enjoyed a continued upward ride on the market rollercoaster. Throughout trade on Thursday, the February live contract saw an intraday high of $144.57, but closed the day with $143.93, a weekly gain of $3.58. Contracts farther out saw some value trading and profit taking on Wednesday and Thursday, with Thursday’s profit takings consuming the gains posted on Wednesday. By Thursday’s settle, the April contract stood at $140.60, a weekly gain of $1.30.

“There’s a reason the back months aren’t keeping pace with the front months because the market is of the opinion that once this nearterm cash squeeze is over with, we’re going to see the cash break hard up front. That’s why I think as a hedger you have to be a scale up seller in the back months,” advised Vetterkind.

Feeder cattle

It’s possible the honeymoon is drawing to a close on the extreme run-up in prices for feeder cattle. Possible, not guaranteed, mind you. Many of the surveyed feeder auctions reported prices were uneven and in some cases even declining from prior highs. Vetterkind noted last Thursday that demand is still high for lightweight cattle and the supply of medium and large 1-class (#1) steers ready for the feedlot are still doing well for the most part.

Colorado: At the La Junta Livestock Commission Company Inc., only 724 receipts were collected compared to the prior week’s 2,345. As such, it was difficult to quote trends on feeders. Slaughter cows were up $3-5 while slaughter bulls were steady, though demand was said to be good for these classes of cattle. The few #1, 7-weight yearling steers that sold did so in the full range of $160.

Iowa: In the Russell Feeder Cattle Auction, estimates were for 4,600 receipts. Light steers were steady with steers weighing between 400-500 lbs. up $4-8. Steers over that weight were down $1-4 with similarly weighted heifers being $2-5 lower. Many hundreds of 7-weight #1 steers sold with prices decidedly in the mid-$170s.

Kansas: The Winter Livestock Feeder Cattle Auction in Dodge City collected 5,205 receipts last week. Mid- to heavyweight steers and heifers were called “weak” to down $2. Lighter weight feeders were called steady to firm on a limited test. Trade and demand were called moderate. 7-weight #1 steer calves sold for $160, while yearlings ranged from $166.29-171.90.

Missouri: At the Springfield Livestock Market Center, just over 4,000 receipts were collected, more than the prior week and more than the same sale last year. Feeder steers and heifers were mostly called steady on good demand. The quoted #1 steers in the 700-pound range sold solidly in the mid $160s. Over at the West Plains-Ozarks Regional Stockyards, another 4,500 receipts came in with feeder steers fetching $2-3 with the exception of 500-600 lbs. which were $2-5 lower. Peewee heifers were down $5, while all others were up $3- 5. Demand was called good. A collection of 29 721-pound #1 yearling steers brought an average of $171.23 while a 58-head batch of #1 yearling steers averaging 778 lbs. brought $160.44.

Montana: The Public Auction Yards of Billings maintained its modest volumes last week with 638 receipts collected. Feeder cattle were lightly tested so no trend was offered. There were no 7-weight #1 steers, but steers of bookending weights ranged from $184.50 for a group of seven 688-pound #1 calves, and $159.50 for eight head of 879-pound #1 yearlings.

Nebraska: The Huss Platte Valley Auction sold an estimated 5,300 head with feeders bringing steady to $5 higher money than the prior week. The largest advances went for 7-weight offerings headed to feedlots. Demand was called good to very good. The majority of the #1, 7-weight yearling steers sold in the $170s, with $178.51 being the high for lighter steers in the range and $172.51 being the low for heavier steers in the range. Fleshy yearlings and calves were offered in lower volumes and sold in the mid- to high-$160s.

New Mexico: The Roswell Livestock Auction sold 997 head last week. Feeder steers were called unevenly steady to weak on light comparative sales. Exceptions existed for steers weighing between 400-500 lbs., which were down $5-10, though reports noted the quality was not as attractive as on comparable sales. Prices for #1, 7-weight yearling steers ranged from $158.46-162.

Oklahoma: The OKC West-El Reno sale collected a whopping 8,608 receipts last week. Feeder steers sold steady to up $1 with moderate to good demand. Heifers were decidedly steady while calves of both sexes were $3- 5 lower. The bulk of the 7-weight offering sold between $167.44-173.74, while value added offerings fetched $175.

Wyoming: At the Riverton Livestock Auction, 3,933 receipts were collected. Demand was good for slaughter cows which sold $5-8 higher. Feeder calves were uneven with instances of up $6. Peewee heifer calves sold stronger with instances of $5-10 higher. Demand good with good buyer attendance. Steer calves in the #1, 7-weight sold between $162-178. At the Torrington Livestock Commission Co. an estimated 3,600 receipts were collected with feeders selling unevenly steady to up $2. Prices for #1 yearling steers ranged from $176.34-180.79.

With all the attention on cash fed cattle and product values, feeder futures got very little notice. Both of the near-term contracts gained over the week, but that was somehow less impressive than the stellar gains elsewhere. With a close of $170.38 for the January feeder contract and $169.88 for the March contract, they gained 38 cents and $1.95, respectively. Vetterkind warned that feeder futures are fairly overbought, so a cleanup is likely. — Kerry Halladay, WLJ Editor

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