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Monday, June 23, 2014

Cash fed, product values climb

by Kerry Halladay, Associate Editor

The markets were alive last week! Cash feeders were still shooting for the stars, feeder futures were bouncing off the walls, and—despite analysts’ predictions—the bulk of the cash fed trade was accomplished ahead of last Friday’s Cattle on Feed report. By close of trade on Thursday afternoon, nearly 61,000 head had traded at $147-150 live (up $2-3 from the prior week) and dressed trade was steady at $234-238.

This action opposed analysts’ predictions that trade would wait until after the release of the Cattle on Feed report. Troy Vetterkind of Vetterkind Cattle Brokerage pointed to Wednesday’s severe break in the futures markets as having spurred some cash buying interest.

“Cattle futures settled lower [Wednesday], led lower by limit down feeder cattle as that market corrects from an extremely overbought market condition,” he explained Thursday morning. “There wasn’t really any serious technical damage done on [Wednesday´s] break, however I think we are in the process of validating Tuesday’s reversal trade and I believe we could see a deeper correction in coming days.”

Though most of the spectacular negative action occurred in the feeder futures—where all but one contract on the board settled at limit down on Wednesday—the live contracts were not spared. Throughout the week, near-term contracts traded three-digit gains and losses from day to day. By Thursday’s settlement, the up-front contracts had gained modestly. The June contract gained 40 cents to settle Thursday at $148, while the August contract gained 84 cents with $147.47.

Though many of the market movers lately can be traced to the short supply of feeders, domestic and export demand for beef was an unexpected bright spot last week. Though Andrew Gottschalk of Hedgers Edge warned of the seasonally-impending “dog days of summer,” which could see beef demand flag, last week news was good.

The most recent Food Demand Survey out of Oklahoma State University was released and showed consumer willingness to pay for beef items up spectacularly for the coming months. Respondents to the monthly survey reported their willingness to pay for steaks increased 18.43 percent compared to the May report, and increased 10.57 percent for hamburger. These increases were reported, despite the fact that respondents also expect that beef prices will increase.

On the retail side, however, demand is cautious.

“Domestic buyers do remain somewhat cautious about stepping out and taking on too much product at the current market price as we are entering a period of time when beef demand slows down going into the heat of the summer,” noted Vetterkind.

Export demand, however, was particularly encouraging. In addition to the news regarding Hong Kong (see Traci Eatherton’s cover story on the topic), net export sales of 16,100 metric tons last week were up 33 percent compared to the four-week average. This added demand, coupled with continued low supplies, has had the effect of driving up the cutout.

“Product values continue to march onward and upward on late pricing for the July 4th period,” commented Gottschalk. Over the course of last week, the Choice cutout gained $8.59 to close Thursday at $240.46 and Select closed at $233.09, a gain of $9.37.

Feeder cattle

“The perfect storm of overcapacity in the feedlot sector, along with much improved pasture conditions compared to a year ago, and heifer retention continues to drive the cash feeder market sharply higher and there are no signs of this going away anytime soon,” noted Vetterkind, adding later that currently nothing suggests that the cash feeder market has reached a kind of top.

The auctions bore that out last week. While some auctions reported week-to-week declines, the majority of the surveyed auctions again reported prices up $8-10 in many cases. With the exception of some far western states, almost all the prices for medium and large 1-class (#1) steers in the 700-800 lbs. range started in the low $190s and went from there. Prices as high as $230 were seen repeatedly.

California: There was big demand, both local and from out of state, for feeders and stockers in California sales. The Western Stockman’s Market reported record highs for feeders and stockers at up $5-10, while Turlock reported much the same as its 7-weight, #1 steers fetched anywhere from $190-230, Holsteins $100-156. The Cattlemen’s Livestock Market in Galt upped the ante with 7-weights bringing $200- 230.

Iowa: The Iowa Weekly Weighted Average Feeder Cattle Report noted that very few cattle sold in Iowa last week, with just barely over 1,000 receipts. The few benchmark steers that sold ranged from $190.25-216.

Kansas: At the Pratt Livestock Feeder Cattle Auction, heavyweight steers were just about the only thing offered and they were called $5-7 lower with nothing offered under 800 lbs. At the Winter Livestock Auction, however, heavyweights were not well tested, though 7-weight steers sold steady to up $4 at between $196- 202.

Nebraska: The Huss Platte Valley Auction collected 3,025 receipts. Heavyweight steers sold up $2-4, with all other weights of both steers and heifers “sharply higher,” though no numeric trends were offered. Seven-weight, #1 yearling steers went for $208-230.

Oklahoma: The OKC West-El Reno collected over 5,000 receipts with feeders selling steady. Things were good until the futures market closed limit down on Wednesday, but benchmark steers still brought between $195.25-213. At the National Stockyards in Oklahoma City, 8,239 receipts were collected and feeder steers were up $6-10 with some instances of up $10-15 on heavyweight steers. Heifers were called up $4-6. Calves were just flying out of the auction ring with steer calves up $8- 10 and heifer calves up $10- 14, with instances of up $17 for upper 5-weight heifer calves. Prices on #1 steers in the 700-pound range ran from $195.50-218, calves being on the lower end.

South Dakota: The Hub City Livestock Auction almost tripled its receipt volume at 3,414 compared to the prior week, making comparisons difficult. Heavyweight steers were called up $4-5, with 7-weight #1s bringing between $200.50- 229. The upper end came from some value-added steers. In the Mitchell Livestock Auction, the opposite situation was the case; there were too few receipts last week compared to the prior week for trend quotes. Despite that, benchmark steers brought between $209.50- 224.50.

Utah: The Producers Livestock Auction of Salina saw light receipts but had enough comparable sales to call feeders mixed, but mostly $3-4 lower. Benchmark yearling steers ran from $175-194.

Washington: At the Stockland Livestock Auction of Davenport, receipt volumes were higher than usual, but there were still no trends available. Slaughter cows made up half of the offering. The few 7-weight, #1 steers sold went for $177.50-188.

Vetterkind was of the opinion that the feeder futures will correct lower in the coming weeks, which may slow down the breakneck race to the top seen in the cash feeder market.

“Not that it has to break real hard, rather just not put on $5-$10 per week like it has been.”

Whatever might happen in the near-term, it did not happen last week in the feeder futures market. Many analogies have been made lately of the behavior of feeder futures—rocket ships shooting for the stratosphere come to mind—but last week the most apt analogy was a yo-yo. In the span of one week, almost the entire futures board saw two at or near limit up settlements and one limit down settlement.

“Volatility remains the name of the game,” commented Vetterkind with an air of extreme frustration. “How in the world can you even have markets like this? Whatever, the futures market is cooked up, as is the cash market in my opinion. You have everyone in the world back bullish in the cattle market again, which in my opinion means be careful with longs here, because that usually means we have to go beat the bullish folks up a little bit.”

Over the course of last week, near-term contracts actually lost value when all was said and done, despite the strong individual-day gains. August feeders lost 60 cents to settle Thursday at $207.55, and the September contract lost 16 cents to settle at $208.57.

The future of feeders

Feeder futures aren’t the only forward-looking element in the world of feeder markets. Though available now as you read this, at the time of publishing the most recent Cattle on Feed report had yet to be released. The contents of the report were much anticipated by the market last week and many held their breath on the topic of placements.

“All analysts polled indicated that they expect feedlots to have placed fewer cattle on feed during May,” said Steve Meyer and Len Steiner of CME’s Daily Livestock Report last Thursday, speaking of the Bloombergpolled industry analysts. “In part this reflects the overall shortage of feeders available (hence the spike in feeder prices), as well as a recognition that last year May placements were relatively large.

On average, analysts expect May placements to be down 7.4 percent compared to a year ago.”

Several items contribute to this expectation of declining placements, central being the general quality of pastures this year relative to last. In the most recent Crop Progress report, 54 percent of the nation’s pastures and ranges were considered good or excellent (up 3 percent from the prior week) and only 17 percent were considered poor or very poor (down 2 percent from the prior week).

“We cannot stress enough the impact that good pastures and improving hay conditions have on both feeder availability and the supply of cattle that will be available for marketing in late 2014 and first half of 2015,” said Meyer and Steiner.

The other element of the improved conditions is that heifer retention is likely to stick this year, as opposed to prior years where drought conditions forced producers to abandon their herd rebuilding plans. Derrell Peel, Oklahoma State University Extension Livestock Marketing Specialist, pointed this out in his comparison of the feeder markets of 2014 versus 2013.

“Though drought conditions persist in some regions and even expanded until recently, larger hay supplies and improved forage conditions in other regions suggest that heifer retention and herd expansion are underway. Heifer slaughter so far in 2014 is down 8 percent and beef cow slaughter is down 13.8 percent, along with an 11.5 percent year-todate decrease in dairy cow slaughter.”

He pointed out also that feeder prices this time last year bottomed counter-seasonally and the aforementioned supply details this year have pushed prices up 50 percent of what they were last year. When considering the future, he suggested some possibilities.

“Having reached such breathless levels in the past few weeks, it seems unlikely that prices will continue to move higher. At the same time, there is little reason for feeder prices to drop much, if any.”

Of those things he projected could negatively impact the feeder market, he cited upward price changes in the corn market. “Rapid and widespread redevelopment of drought conditions,” which would likely result in a flood of previously retained heifers into the supply chain, could also threaten the supply-driven high prices.

“Neither of those weather related factors seem especially threatening at this time,” he noted, however. — Kerry Halladay, WLJ Editor

 
 


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