— Monthly reports show beef supplies low, slaughter favors steers
Cash fed prices were exciting last week. Rumors of a few cattle trading early in the week at $162 live stoked the fires and rapidly climbing futures values did nothing but fan the flames further. The fact packers were caught with unmet grinding beef demands and smaller showlists, plus the very bullish Cold Storage report (see below), made for very serious trade.
The early week rumors were confirmed in a huge flood of cattle buying on Thursday. Prices ranged from $159-165 (average $162.79) live and $252-262 (avg. $257.44) dressed.
And as the cash cattle race forges on, the futures rollercoaster continues!
Midweek live futures trade was hot, which added energy to the cash market. After correcting upward from an “oversold” state the prior week, live futures saw at or near-limit up trade for near-term contracts on Tuesday, as well as respectable gains on Monday. Wednesday saw some three-digit losses in deferred contracts, but set new near-term contract highs. By Thursday the August contract had gained almost $5 over the course of the week with a settle of $156.55. October was less mobile with a gain of $3.73 at the Thursday settlement of $158.05.
“The quick price recovery from this technical position is positive,” said Andrew Gottschalk of Hedgers Edge. “Typically, the sooner the response to an ‘oversold’ or ‘overbought’ level, the more pronounced the price response. If the response is delayed, too much momentum is lost to sustain a move.”
Troy Vetterkind of Vetterkind Cattle Brokerage cited the supply/demand factors for packers that were assumed to drive up cash trade. He also speculated that the market was in a “buy the rumor, sell the fact” scenario with the most recent Cattle on Feed report that came out Friday. Though the report is available as you read this, as of publishing, it was not. Estimates ahead of the report were population on feed down 1.8 percent, placements down 4.4 percent, and marketings down 1.9 percent.
One ongoing trend that likely did not account for the high prices of cash cattle and/or the futures was the continuing restricted production rate. Last week was estimated to have a 575,000-head production rate following the prior week’s 577,000 head.
The reduced production has helped keep cutout values high, however. Over the course of the week, the Choice cutout advanced $7.11 to $255.56 and the Select cutout gained $10.19 to close Thursday at $252.84.
Another thing the reduced production has done is contribute to tight supplies of grinding beef. Beef in cold storage is majority grinding beef, and numbers were much lower than last year. Added to that, imports of grinding meat have tightened up recently and usual domestic supplies are down.
“Overall cow slaughter numbers have been particularly limited this year given short cull cow supplies and big incentives for cow/calf operators to retain as many cows as they can,” Steve Meyer and Len Steiner of the CME Daily Livestock Report noted.
Added to all this is the fact that demand for ground beef remains surprisingly high.
“Ground beef continues to move well at the retail level while steak items slowed appreciably reflecting the post July 4th price advances of $2-3 per pound,” said Gottschalk. Indeed, in local Denver-area grocery stores, per-pound prices on standard mixes of ground beef are regularly outstripping or matching muscle cut prices.
“Demand for grinding beef has caught packers short on cattle inventory to kill so in order to get these beef orders filled we’re going to see some stiff competition between them to get enough cattle bought,” said Vetterkind Thursday morning, noting that the demand for ground will prove very beneficial to the beef complex in the immediate near term.
“The beef market as a whole is going to be supported until some of the pressure comes off this grinding beef market. Early estimates have Australian beef exports to the U.S. in July 90 percent above a year ago, but this beef is just being shipped now and it will be a couple weeks before it starts showing up here.”
While pointing out that the seasonal demand slump is upon us, Gottschalk pointed out the contextual element.
“The dog days of summer are upon us and seasonally demand suffers a decline. Retailers are wasting no time in raising prices to reflect record cattle prices and record cutout values. The recent record cattle and cutout values will force retailers to advance their average retail beef price to $5.70 per pound, up from the most recent monthly average price of $5.45. That is the bad news. The good news is the retail prices YTD have not slowed consumer demand for beef and meat. To the contrary, second quarter retail beef demand increased approximately 6 percent.”
He said the key factor supporting beef demand is the employment situation and income gains with the greatest risk to those elements coming from outside.
“The greatest risk to the cattle complex continues to be external factors such as an unforeseen financial shock. It was only this past week that the head of the International Bank of Settlements issued a dire warning, ‘The world financial situation is potentially more serious than in 2007 and China is on the verge of collapse.’ For those who do not know, the International Bank of Settlements is the Central Bank for Central Banks. While the U.S. has worked diligently to improve its financial situation most other countries have not followed suit. Second quarter and more importantly second-half 2014 will show accelerating domestic economic growth. We see no reason, other than an outside shock, that will prevent second-half GDP from growing 3-3.5 percent.”
That downturn in feeder cattle prices reported in last week’s paper? Yeah, just a fluke, apparently. Last week saw cash feeder prices return to their (almost) unbroken three months of headlong gains.
Across the surveyed feeder auctions, feeder cattle were overwhelmingly reported to be up, and up respectably, from the prior week’s trade lull. Supplies of offered cattle seemed to be down as evidenced by the reduced receipt counts reported. That said, prices on medium and large 1-class (#1) cattle weighing between 700-800 lbs. were almost entirely over the $200 mark, with some reaching the lofty heights usually reserved for video auctions.
California: At the Cattlemen's Livestock Market of Galt, feeder cattle were said to be taking off higher. Feeders under 700 lbs. were called up $10-15 while those over were up $6-10. A 7-weight, #1 steer was bringing between $210-235.
Internet: Northern Livestock Video Auction held their annual “Summertime Classic,” selling over 65,000 head all across the country. As some example lots, 100 head of 400-lb. feeder heifer calves sold for $317.50, 100 head of 420-lb. steer calves from the same farm sold for $337.50 to the same buyer, and 85 head of 700-lb. steers sold for $250.50.
Kansas: The Winter Livestock Feeder Cattle Auction of Dodge City collected a little over 1,100 receipts. As this was half of their prior sale’s volume, no trends were offered, but a higher undertone was noted. Very few #1 steers were offered, and those that were offered were over 750 lbs. The three dozen heavy 7-weight, #1 steers sold ranged from $203 for calves to $218.25 for yearlings.
Missouri: At the Joplin Regional Stockyards, steer calves were up $5-15 after the prior week’s sharply lower trade. Heifer calves were not so spectacular at steady to up $2. Benchmark steers sold between $200 for calves and fleshy yearlings to $219 for lightweight yearlings.
Nebraska: Volumes were limited at the Bassett Livestock Auction with barely a quarter of the prior week’s sale volume being offered. That said, prices were amazingly higher on classes of cattle for which trends were available. For 650-lb. steers, prices were up $23, and up $10 for 850-lb. heifers. Seven-weight #1 steers brought an amazing $238.50 for calves; up to $249 for light yearlings.
New Mexico: The trio of market-setting auctions in the Land of Enchantment actually had sales to report last week. For most of the sales, trends were up compared to their most recent prior sale. At the Roswell Livestock Auction, the handful of 7-weight, #1 yearling steers sold for $208.50, while at the Clovis Livestock Auction they ranged from $205-211. The Cattleman’s Livestock Auction of Belen saw them sell from $178-205.
Oklahoma: Offerings were down across Oklahoma’s major auctions, but still the prognosis was up. Feeder steers were called steady to up $7, while feeder heifers were steady to up $10. Calves were mixed between the El Reno Livestock Market and the Oklahoma National Stockyards. National called them steady to lower, while El Reno called them up $7-10 on a light test. National was selling 7-weight, #1 steers for $211-225.50 while El Reno sold them for $217-233.
South Dakota: At the Mitchell Livestock Auction, receipt volume was strong compared to other sales. Heavier feeder cattle were up, with steers called steady to up $7 with price advances going along with weights. Heavy feeder heifers were up $5-10 with instances of up $12-15. Benchmark steers fetched between $218-233.75.
“Additional price gains are likely during August as ranchers elect to keep cattle on grass as long as possible,” noted Gottschalk early in the week. “The economics of extending ownership is unmistakable; it pays to add weight. Additional withholding of heifers for herd rebuilding is likely as feed supplies are replenished. The latter, further limiting the available feeders and calves to be placed into feed yards.”
The proverbial stage last week was getting crowded out by market stars, but feeder futures did get some time to shine. Over the course of the week, the near-term contracts gained handily. August gained $5.68 to settle Thursday at $217.33 and September feeders gained $5.85 to settle at $218.05.
Cold Storage, Livestock Slaughter
Last week saw the release of the monthly Cold Storage and Livestock Slaughter reports. The Cold Storage report was viewed as bullish for beef and the Livestock Slaughter report supports projections of slow herd rebuilding.
According to the Cold Storage report, stocks of all meat (total red meat and total poultry) are overwhelmingly down by volume as of June 30. Beef in particular has ceded considerable actual and proportional freezer space to pork which was competing with chicken stocks in terms of representation.
A total 357.76 million pounds of beef were in all warehouses with a little under 90 percent of that being boneless beef for grinding. That volume of beef represented 38.5 percent of all red meat in storage (down from 44.9 percent June 30, 2013) and was just 18.4 percent of total meat in storage (down from 20.7 percent last year). This situation reflects the growing effort and market pressure to pair supplies with demand. The strategy has so far been working out well for packers as it helps to prop up carcass values during the “dog days of summer,” traditionally a slow period for domestic beef demand.
Pork as a proportion of red meat and total meat increased even though actual volume decreased. Last year, pork represented 52.8 percent of red meat and 24.4 percent of total meat storage with 565.06 million pounds of pork. This year, with 537.71 million pounds, it represents 57.8 percent of red meat and 27.6 percent of total meat in storage.
For the first time in a long while, chicken’s proportion of stored meat actually declined. Actual volume of stored chicken—at 556.83 million pounds this year—declined from last year, but chicken’s proportion of total stored meat fell from 29.3 percent last year to 28.6 this year. As a proportion of poultry, chicken stayed steady at 54.6 percent.
The monthly Livestock Slaughter report was released last Thursday, reporting on all cattle slaughtered through to the end of June. Federally inspected slaughter for June numbered 2.57 million head, down 5 percent compared to June 2013. Year-to-date slaughter stands at 14.97 million head, down 6 percent from the same period last year.
The class breakdown of cattle slaughtered under federal inspection is continuing to skew more towards steers. For June, steers represented 54.4 percent of the mix, heifers represented 27.8 percent, and “other cows” (beef cows) represented 8.2 percent. This compares to June 2013 where steers were 53.3 percent, heifers were 27 percent, and other cows were 9.8 percent.
Calf slaughter is down significantly. With 56,700 head slaughtered in June, calf slaughter decreased 21 percent compared to June 2013. Year-to-date calf slaughter is down 16 percent at 304,900 head. — Kerry Halladay, WLJ Editor