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Monday, August 4, 2014

Ground beef holds up cutout values

by Kerry Halladay, Associate Editor

Cash fed trade was slow to develop last week as packers, reportedly flush with cattle sufficient for their reduced production rates, were content to let the cash market cool off. Analysts expected trade to be steady with the prior week’s $160-165 live and $255-262 dressed. While those prices are high, staying steady compared to a one-week $6-10 increase as seen the previous week counts as “cooling off,” relatively speaking.

“Packers did buy quite a few cattle last week and will likely stay off the market until late in the week,” noted Troy Vetterkind of Vetterkind Cattle Brokerage mid-week. “Kills might get bumped up a little this week but the fact that they have some extra inventory around them this week might mean that the extreme competition they have been in amongst themselves for cattle might subside a bit this week. That said, with the historically strong demand for end meats to grind, competition for cattle to kill will remain stout for the near-term.”

And that detail was one of the most important last week: demand for ground beef.

America has been called a ground beef nation with Americans taking about 60 percent of their total beef consumption in ground form. It seems the increasing prices of beef—which in many places is seeing ground beef sell at retail at higher perpound prices than muscle cuts—will not dissuade Americans from their burgers.

The cutout was held up last week almost entirely on demand for grinding beef. Chucks, shoulder clods, end meats, and all the usual suspects for grindable cuts were in strong demand, allowing packers to sell them at a premium. All the while, the regular stars of the grill in the middle meats were left to languish, being offered for lower money to move them out of packer warehouses.

“The whole beef market hinges on finding enough product to grind for ground beef production right now. Just exactly how all of this works out I don’t think anyone really knows.”

Vetterkind speculated that it will take increased kills, heavier cattle, and retail prices finally finding a height lofty enough to shut off domestic demand. This latter detail was a topic of much discussion last week.

“Retailers are wasting no time in raising prices to reflect record cattle prices and record cutout values,” reported Andrew Gottschalk of Hedgers Edge. “Consumer demand will encounter another severe test as the advances in retail price are implemented.”

He opined that average retail beef prices will need to advance to $5.75-5.80 per pound to reflect record prices higher up in the supply chain. Current average retail prices have been hovering around $5.51.

Steve Meyer and Len Steiner of CME’s Daily Livestock Report pointed out that average retail Choice beef prices stood at $5.94 per pound in June, according to the most recent reports. That level is 12.6 percent higher than last June.

“June marked the fifth straight month of record highs. It was also the 13th time in the past 19 months that the Choice beef price has set a record.”

On the wholesale side of the beef complex, the Choice cutout gained handily last week. From the prior Friday to last Thursday, Choice gained $6.28 to close at $263.66. Select similarly gained $6.27 to close Thursday at $260.60.

The futures market has become rather pendulous in the past several weeks, swinging from overbought to oversold and back again in rather short order. Last week saw analysts declaring it overbought again after the previous week had corrected from an oversold position. All around, however, the futures market was something of concern to Vetterkind.

“The risk in the cattle futures trade is immense and will only grow the higher the market goes. I still do not think this is a place to be long the market and would continue to be using strength in the futures market to position oneself from the bear side.”

That fear might have been well placed as last week saw relatively sideways action in the first half of the week, followed by a respectable break on Thursday in what might have been the beginning of a correction. Over the course of the week, the August contract lost $1.25—all of it and then some sustained on Thursday—to settle at $157.85. The October contract took a worse hit on Thursday, shedding $2.60 on that day alone for a total $2.47 lost over the week at $157.33.

Feeder cattle

Ranchers are keeping cattle longer as rains in most of the country have made for good grazing. It just makes sense to keep cattle and add grass weight to them.

“The economics of maintaining and extending ownership is unmistakable,” noted Gottschalk. “Additional withholding of heifers for herd rebuilding is likely as feed supplies are replenished.”

And tight supplies were again felt as many sales surveyed had no medium and large 1-class (#1) feeder steers to report in the 700- 800 lb. range. There was an interesting trend towards heavier feeders, which saw some premiums in a few states.

California: Things were steady across the board at the Cattlemen’s Livestock Market in Galt, though offerings of feeder cattle were in a narrow weight range. Benchmark beef steers sold between $210-235.

Internet: The Superior Livestock Auction held their multi-day Video Royale XXII sale last week, selling over 65,400 head of cattle by the time of publishing, with 107,000 head being offered on Friday. Seven-weight steers sold between $207- 261, with most prices in the upper $220s. The high was seen in Region 1 for lighter weight steers in that range.

Iowa: The main Iowa sales were back up and running last week, though with lower than usual volumes, making for no comparisons. Benchmark steers sold between $217-240.

Kansas: In the two major auction markets in Kansas, prices were up on feeder steers. The Pratt Livestock Feeder Cattle Auction called heavyweight feeder steers up $6-12, but mostly up $10- 12, and the Winter Livestock Feeder Cattle Auction posted them as up $12-13. Heifers in both locations were up around the $5 mark. Pratt had no #1 steers under 840 lbs. to quote, but the Winter auction sold 325 head of 784- lb. steers for an average of $229.61.

New Mexico: Sales were active across New Mexico last week. Feeders were called up $4-8 in most cases with select weight groups of steers at the Clovis Livestock Auction fetching as much as $15 higher than prior sales. Prices for #1, 7-weight steers ranged from $205-228 on relatively light volume.

Oklahoma: Receipt volumes were good across Oklahoma and prices were strong. In the National Stockyards, feeders were called up $4-8 with steer calves up $5-10. Benchmark steers sold for $220-233.50. At the El Reno sale, feeders were up $3-6 with calves up $8-10 on a limited test. Seven-weight, #1 steers sold between $210- 238, with calves setting the lower end.

South Dakota: At the Sioux Falls Regional Livestock auction, receipt volume was good, though prior sales were too light for a proper trend. That said, strongly higher undertones were noted. The 7-weight, #1 steers offered sold respectably between $236-243.

Regardless of who started the break in the futures market on Thursday, the feeder futures finished it. Yet even with everything on the board near or at limit down on Thursday, the near-term contracts still came out ahead in the weekly balance sheets, given earlier strength. The August feeder contract gained $2.43 over the course of the week with a Thursday settle of $220.68, and the September contract gained $1.95 to settle at $221.20. This was after losses of $2.35 and $3, respectively, from Thursday’s trade.

As with the live cattle futures, Vetterkind repeated warnings about the high prices of feeder futures. Before the Thursday break he was making strong statements of caution.

“I don’t care how bullish you are if you’ve got cattle to sell in the coming months I think you have to have put options or some sort of put option strategy on up here at these price levels in both live and feeder cattle right now. At least with the options you don’t have to worry about margin calls and if the market continues to rally you can roll your puts up to a higher strike. We’re going to put a top in this market up here somewhere and my fear is that when it lets loose to the downside the move could be quite vicious.”

It’s quite possible the break seen Thursday was the beginning of this vicious downturn.

“Options on futures are your best friend in a market like this because as the name states you have op tions to manage your position, unlike futures.”

General Economy

The other big topic of last week’s market was the state of the outside economy, something often said to be the biggest risk to the cattle and beef markets. To the relief of producers and all Americans alike, things seem to be doing well in the American economy. Relatively speaking, that is.

The Bureau of Economic Analysis released a report last Tuesday reporting that the U.S. economy grew in the second quarter. Gross Domestic Product (GDP)— the market value of goods and services, gauged from both the providers’ and consumers’ perspective—grew by 1 percent in the second quarter.

“Recall that that rate is significantly better than the original Q1 estimate of –0.73 percent or an annualized rate of –2.9 percent,” reminded Meyer and Steiner.

“The first quarter performance was largely attributed to harsh winter weather that kept consumers, especially on the East Coast, hunkered down for many weeks.”

Combining the first and second quarter movements of the economy, Meyer and Steiner said a year-on-year growth rate of 2.4 percent is implied. That is good by comparison to recent years, though not to past recovery periods.

“This recovery has clearly been slow in this regard but we would argue that disappointing personal disposable income growth has been a key issue as wage growth has lagged. Real personal disposable income per capita increased at an average year-on-year rate of just over 2 percent from 2000-2007. Since that time, it has grown by an average of just 0.4 percent. This year has seen some improvement but the average is still a meager 1.4 percent.”

But growth is still growth, which is good for beef. There is even hope that real personal disposable income per capita will pick up to about 3 percent by the end of this year. — Kerry Halladay, WLJ Editor


 
 


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