The cash fed trade was slow to develop last week and that was certainly to the benefit of packers. A hard break in the live futures, larger show lists, along with longanticipated rumors of declining production to meet the incoming reduced beef demand from retailers and consumers, frustrated early-week expectations of live trade over $160 by putting leverage in the hands of packers. By Thursday afternoon, nearly 72,000 head of cattle had been confirmed sold, with prices ranging from $154-160 live (average, $155.91) and $244-249 (avg. $247.55) dressed.
“Futures are under pressure again this morning, which the packer is going to try and use to his advantage to buy cattle cheaper again this morning,” reported Troy Vetterkind of Vetterkind Cattle Brokerage on Thursday morning. “And they probably get the job done as margins are getting thin, show lists are larger, beef business is slowing, and they are going to cut kills this week and next.”
Despite many moving parts playing a role in the decreased cash market last week, the break in the live futures was certainly a big mover.
Following the recent spectacular gains in the futures market in past weeks, last week saw a daily decline across the board. Early in the week, daily losses were just a few cents on each contract, but by Wednesday and Thursday, the losses were deep into the three digit area. From Thursday to Thursday (the prior Friday having been a holiday) the August contract lost $6.85 to close at $148.15, and the October contract lost $6.17 with a close of $150.73. Of those losses, $5.38 and $5.26, respectively, was sustained on Wednesday and Thursday.
“Key technical points were violated with yesterday’s futures price action,” reported Andrew Gottschalk of Hedgers Edge Thursday morning. He credited “funny money” with the recent volatility. Vetterkind also speculated that “funny money”—i.e., investors rather than actual cattle hedgers—were involved with the market’s activities. Speaking on Thursday, he noted that the steep losses sustained did not necessarily translate into changes in open interest.
“Interesting to note the huge volume of trade yesterday in the live cattle with only a minimal change in open interest. So someone took on some futures inventory on the break yesterday.
Assume it could be commercial interests involved there.
Can’t explain enough the amount of risk at these price levels in the cattle. The technicals are starting to break down and that could be the driving force behind price direction in the near-term.”
The other big mover of the cash market was one that’s been anticipated for a while now; seasonally declining domestic demand. Last week was the first week following July 4 and that traditionally marks the beginning of the “dog days of summer” where beef demand drops off. This was a topic everyone wanted to talk about.
“With July 4th business behind us, market participants will now reassess where we go with cattle and hog prices in the summer months,” explained Steve Meyer and Len Steiner of the CME Daily Livestock Report. “From a seasonal perspective, beef business tends to slow down a bit in July and early August before ramping up again for Labor Day and also the start of the new school year.”
“It is one thing to induce consumers to grill in the backyard in May when flowers are blooming and the smell of new grass is in the air. It is more challenging when it is 95 degrees out and they have already been grilling for two months,” they added.
The other issue domestic demand faces in the immediate future is that retail prices have to answer for the economics that have so far been ignored by retailers trying to capitalize on surprisingly strong demand; prices must go up.
“To reflect the last week’s cash trade at $158, average retail beef prices need to advance to $5.70, up from the current price of $5.45,” advised Gottschalk. He has long warned that retail beef prices have not accurately reflected the upstream costs of wholesale carcass values and cash cattle prices. But as the season of expected lower beef demand begins, retailers have less motivation to stay the rising tide of beef prices.
“Beef features at retail are said to be at their lowest levels in several years due to the sharp spike in prices and this has many thinking that cutouts have increasing risk to the downside in coming weeks,” said Vetterkind.
But there are reasons to be optimistic about the future. Many market moves this year have bucked the seasonal trends and it’s possible the same may happen with domestic demand too. Meyer and Steiner pointed out that demand for beef has been dauntlessly resilient throughout this year despite the repeatedly record-setting prices. Also, outside factors could come to bear on potential beef demand.
“We continue to see the economy improving with gains in employment and wage income,” noted Gottschalk. “These factors will serve as a buffer to any seasonal weakness in beef demand.”
The increased wage income might well be needed as the interplay between supply and demand continues to prop up cutout values. With demand for grinding meats, and low and reduced production rates expected, the Choice cutout held up well last week, despite declines in fed and futures markets. Over the course of the week, Choice gained $4.05 with a Thursday close of $252.17, while Select gained $2.40 with a close of $243.52.
The holiday week turned out to be a 491,000-head production week, and last week began with estimates as a 605,000-head week, but estimates were revised down to 585,000 head as the week wore on. Packer margins have declined in the wake of their “buy cattle now, ask questions later” approach to acquiring stock in recent weeks.
A trend has been developing in the surveyed feeder cattle auctions of late, namely, price changes in feeder cattle are being quoted as just that, feeder cattle, rather than broken out between steers and heifers. With volumes of available feeders stretched so thin, it seems perhaps old differences that affected pricing are falling away. Benchmark medium and large 1-class (#1) steers weighing between 700-800 lbs. were still holding onto their $200 prices, and just adding to them. Among the surveyed markets, only one mentioned prices for such cattle under $200.
California: During their recent special feeder sale, the Turlock Livestock Auction Yards saw a $5-10 increase on feeders. Sevenweight, #1 steers brought anywhere from $195-235. The Western Stockman’s Market saw the same increases and described big demand for both stocker and feeders.
Kansas: In Dodge City’s Winter Livestock Feeder Cattle Auction, receipt volumes were a bit higher than the prior week at 1,318. Feeders of both sexes were in “extremely limited supply” and went for up $3-6 where trends were available. The few benchmark steers that sold went for between $210.25-218.
Missouri: The Joplin Regional Stockyards saw a rather light sale last week, which made for few market trends, though generally speaking feeders (both sexes; yearlings and calves) were called steady to up $5. Close to 150 head of 7-weight #1 yearling steers sold between $212- 222.
Nebraska: At the Bassett Livestock Auction, 4,600 receipts were collected. Compared to the most recent sale, feeders of both sexes sold steady to up $10. The buying crowd was said to have been at capacity and very intent to own cattle, with particular demand for calves. Benchmark yearling steers ranges from $222-238.50, with the upper end of that range being set by a carload and a half of value added steers.
New Mexico: Receipt counts were down in Roswell, but the prices were not. Yearling feeders of both sexes sold up $5 on limited comparable sales. The nine head of 7-weight, #1 steers that sold went for $200. At the Clovis Livestock Auction, feeder steers brought $8-15 more and heifers $4-9 more than the prior sale. Benchmark steers brought between $204.25-219, with calves accounting for the low end of the scale.
Oklahoma: At the Oklahoma National Stockyards, feeder steers were called steady to up $4 while heifers were called steady on a light test. Calves were called steady to firm. Benchmark steers sold between $210-228.50 with calves again accounting for the low end of the range. At the El Reno Livestock Market, feeder steers sold up $5-8 and calves were up $10. Prices for 7-weight, #1 steers were $212-229 with calves setting the lower end.
Wyoming: The Riverton Livestock Auction saw very small receipt volumes Bob McCan, National Cattlemen’s Beef Association President, said if cattlemen and women want a seat at the table and involvement in shaping the future of the beef industry, attendance at the Cattle Industry Summer Conference is a must.
The conference features meetings of National Cattlemen’s Beef Association (NC- BA), Cattlemen’s Beef Promotion & Research Board (CBB), American National CattleWomen, Inc. and National Cattlemen’s Foundation.
McCan said the event, hosted in Denver, CO, July 30-Aug. 2, gives cattlemen and women an opportunity last week compared to their prior sale, with almost no standard feeder cattle offered. Slaughter cows, which were up $2-5, and feeder cows, which were up $1-3, dominated the offering. Averagedressing Breaker cows sold for $101, with high-dressers fetching $113-115.
Hopefully you’ve packed your Dramamine if you are in the feeder futures markets, because it has become more of a rollercoaster than the live cattle futures.
“Feeder cattle futures seemed to take pride in leading the cattle market higher over the last couple of months,” commented Rick Kment, Analyst with DTN, Thursday afternoon. “Now the roles have reversed, and given the lack of follow-through momentum in the market, the feeder cattle futures are once again leading the market retreat.”
In Wednesday and Thursday, the near-term feeder contracts lost $5.30 and $5.27 for August and September, respectively. Thursday alone saw the entire board close limit down. That’s a lot of extreme movement. Over the course of the week, the August contract lost $7.03 to settle Thursday at $210.60 and the September contract settled at $212.20, a loss of $6.63.
“This recent shift appears to be enough to change the recent market momentum, and could spark additional longerterm liquidation,” opined Kment. “The main question is what is under the market that will break the fall, as fundamentals have been little changed for the last few weeks.” — Kerry Halladay, WLJ Editor