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Friday, July 11, 2014

A solid market

by Pete Crow - Publisher

The cattle markets have gone wild; last week cash fed cattle were trading at $158 just before the 4th of July. The major retailers were offering bone-in New York strips for $5.99 over the weekend, which should have stimulated beef sales. However, market analysts were reporting that beef sales over the weekend were below expectations. Market analysts were also anticipating that cattle markets would become a little softer after the 4th of July, which is a typical seasonal trend.

 

Surprisingly the beef cutout was a couple dollars higher after the big beef holiday; the Choice cutout was at $252.17 Thursday on moderate to light volume. Packers reduced slaughter levels in anticipation of a slower market and were successful maintaining the cutout values.

The futures markets had a tough week with the August live cattle contract dropping $7 from the contract high of $155.50 to $148.15 set just three days earlier. However, cash fed cattle were trading at $156, expanding the positive cash basis. The futures markets appeared to be trading on emotion rather than fundamentals. The margin calls had to be pretty ugly last week.

Feeder cattle futures were also taking a beating with all contracts trading limit down $3. The August contract was at $210.60 Thursday losing $8 from its contract high of $218.60. I suppose it was time for a correction in the futures markets. The cash markets are leading the way; we just hit a speed bump in the futures.

Andy Gottschalk at Hedgers Edge said: “Key technical points were violated with Wednesday’s futures price action. Look for stepped up seasonal selling pressure to develop. Be reminded that ‘funny’ money is long in the cattle complex, which may lead to increased volatility. Given the ‘current’ state of the fed sector, seasonal weakness should be limited in magnitude and duration. The first level of cash price support is at $152 basis W. KS followed by $148.”

Cow/calf producers are definitely in the driver’s seat in this market. Cattle feeders are treading on thin ice going forward with their breakevens being threatened. Jim Robb at the Livestock Market Information Center calculated that a 750-pound steer placed today would need $160 to break even. The futures markets haven’t shown that market yet but if the premium cash to futures market continues to trade in the $6-7 range, it’s very possible we could see live cattle trade in the $160 zone during the fourth quarter. We came very close to doing that two weeks ago.

Beef demand has surprised just about everyone in the cattle business. Packers have thrown caution to the wind and desperately need cattle, almost regardless of cost. Packer margins have ranged between $15 and $100 per head over the past couple weeks and it appears that the beef cutout will maintain its new trading level between $240 and $250 for a while to come.

Cattle feeders have all the incentive to feed these cattle for maximum yields. The dressing percentage has been growing to 64.5 percent while it is typically around 63.5 percent. Feeders are trying to make these fed cattle as big as possible. Packers are not discounting any heavy cattle, which in my view may start to cause a bit of a problem for retailers and the restaurant trade.

These primals and sub-primals are coming out of the packinghouse with an awful lot of fat on them. I’m sure that the steak cutters are getting a little tired of poor yields. I personally cut up a top sirloin the other day that carried at least 20 percent fat on it, the worst yield I can remember. It reminds me of the ‘70s and ‘80s when consumers declared a war on fat and the beef industry responded with a close trim product. Now they are just passing that fat down the line, reducing the value for restaurant and retail steak cutters.

Cattle feeders have all the incentive to make those fed cattle bigger. With lower feeding costs and a great live cattle market, it gives them an opportunity to offset their high feeder cattle costs. Last week the average carcass weights were 892 lbs. on steers and 803 lbs. on heifers and I’m sure they would like to take them to 1,000 lbs.

Experiencing these cattle markets is exciting and I’m sure a once-in-a-lifetime event. It also looks like it will be with us for a while. It will be difficult to expand the nation’s cow herd quickly, so I would expect these market prices will be with us a long time. — PETE CROW

 
 


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