The price hysteria ebbs

Markets
Jan 31, 2014

It looks official; the honeymoon is over.

“It sounds and feels like the hysteria of ‘get me some beef bought, I don’t care the cost’ and ‘go get some cattle lined up for next week’s kill, just pay them what they want’ that we have seen the last six weeks has subsided for at least the near term,” reported Troy Vetterkind of Vetterkind Cattle Brokerage last Thursday.

“Most of the major beef buyers appear to have coverage into at least the first half of February, which is going to take some pressure off the packer to line up bigger kills with high priced cattle to satisfy buyer’s needs. This probably means we can see both the cash beef and cash cattle markets back off for a couple weeks until we see how well this high priced beef moves at retail or until we get into another squeeze in March/ April when everyone lines up their spring/early summer needs.”

Compared to the last few weeks of early-week trade at absolutely insane intra-week cash fed price gains—not to mention week-to-week gains—last week saw a cash fed market that was slow to get off the starting line. By Thursday afternoon, a little over 11,000 head had been confirmed sold at an average of $126.25 live. This counters the prior week’s sale which saw almost 100,000 head sell at prices ranging from $145-150 live and as much as $240 dressed.

It seems the market is finally sobering to the reality of the difficulty it is to move beef when the cutout is pushing the $240s for Choice. Over the course of last week, Choice product dropped  $6.54 from its prior-Friday close, ending last Thursday at $230.75. Select declined almost the same amount with a Thursday close of $229.79.

“Only additional cuts in weekly production will stabilize cutout values,” said Andrew Gottschalk of Hedgers Edge. “Weekly production exceeding 585,000 head will likely prove to exceed consumer demand as retailers advance their prices to recapture margins.”

Last week started with production expectations numbering in the 595,000-head area, but was revised lower as the week progressed. The combination of market pressure and adverse weather hampering production resulted in calls of “challenged to exceed 580,000” by Thursday afternoon.

The issue of demand in the face of record prices is a two-pronged one; what will retailers do and what will consumers do? On the one hand, retailers for the most part did not raise beef prices commensurate with its run-up to $240 Choice. Average retail price of beef at $5.01—where it’s stayed for several weeks—reflected $206 Choice, meaning retailers’ margins have been suffering. Prices for the consumer will either go up, beef features will be diminished or eliminated altogether, or a combination of both.

Vetterkind told a market anecdote from his own experience early in the week.

He reported that his local grocer in a small west-central Wisconsin town was pricing steaks (rib-eyes, strips, T-bones, etc.) at $11.99/pound, sirloin steaks at $7.79/pound, chuck roasts at $5.69/ pound, round roasts at $4.49/pound, and ground beef between $4.49-4.99/ pound. He noted that the beef bearing these prices was all about 10-20 percent higher than the prices he saw during the prior week’s grocery visit, and all sitting next to pork which didn’t get above $3.60/pound and chicken that was considerably cheaper.

“Some guys are giving up some of their margin and haven’t raised their prices that much,” he said of retailers. “This guy apparently isn’t willing to give up a lot of his margin and is trying to pass the increase on to the consumer…which in my opinion needs to happen because the only way to fix a short supply market is to ration it via high price to shut off demand.”

Gottschalk predicted that following whatever first of the month business that might still exist, most sources, including Gottschalk, have opined that it was long since taken care of. Retailers will “be patient before taking on additional inventory.”

Near-term live cattle futures were largely uneventful last week, trading mostly sideways with the possibility of a bit of correction in the February contract. Over the course of the week, the contract lost $1.25 with its Thursday settlement of $142.15 compared to the prior Friday’s close. Over that same time, the April contract gained slightly, up 43 cents with a Thursday settle of $140.53.

Feeder cattle

Cash feeders were down last week on concerns over the falling cash fed market.

“I think feedlots are concerned that the fed cattle market might correct lower in the coming weeks and of course they have to buy replacement cattle into a discounted fed cattle board, which has them trying to procure cattle with more manageable break-evens,” explained Vetterkind.

According to market reports, most big sales across the country were asking for steady to weaker money for steers, though some sales still saw price growth. In Iowa’s many sales, well over 20,000 head sold with prices for medium and large 1-class (#1) 7-weight steers ranging from $158 for fleshy yearlings to $182 for high quality calves, with most sales in the mid- $170s. In Kansas, prices had a more restricted range, from $155 for fleshy #1 yearlings and $174 for light calves with most prices in the mid-$164.

Nebraska’s sales saw more spectacular prices on #1 steers, with prices ranging from $165 for fleshy yearlings to $187 for “fancy” steers. Most prices were in the mid- to high- $170s. Oklahoma’s OKC West-El Reno sale had few offerings of #1, 7-weight steers, but they averaged $173.31 for some 721-pound yearlings and $165.64 for some 771-pound yearlings. In Washington, prices ranged from $161.50-180 with full-fleshed and thin-fleshed yearlings representing the extremes.

Near-term feeder futures traded similarly sideways, though opposite of live cattle’s movements. The January contract, which will go off the board between publishing and when this is read, gained 98 cents over the course of last week to settle Thursday with $171.68. The March contract lost 18 cents with a settle of $168.70.

Feeder cattle futures have the potential to have shifted wildly last Friday and to continue to move considerably this week depending upon the outcome of the Cattle Inventory report. Released last Friday, the annual report documents the number and type of cattle in the U.S. and gives better insight to heifer retention/herd rebuilding. Look for coverage of the Inventory in next week’s WLJ. — Kerry Halladay, WLJ Editor

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