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Monday, August 11, 2014

Emotional reaction to Russia tanks markets

by Kerry Halladay, Associate Editor

Cash fed cattle trade took its own time in happening last week. By close of the markets on Thursday, 18,288 head had been confirmed sold over the course of the week—not exactly sluggish, but not overly speedy either. The bulk of that volume traded Thursday at $159-162 live and $253-255 dressed, steady to down $4 in both areas.

“It is ironic that fed cattle prices, which advanced contra-seasonally, topped during the week that often marks the summer low in a tight supply condition,” mused Andrew Gottschalk, speaking of the prior week’s cash.

The meat market might have also seen some of its shine wear off. The demand for grinding meat by retail and ground beef by consumers seems to be slacking from recent break-neck paces.

“It seems as though some of the recent strong demand for grinding materials and ground beef has subsided and this appears to be taking the top-end off cutout values,” noted Troy Vetterkind of Vetterkind Cattle Brokerage. “I would look for continued erosion in cutout values for the balance of this week and next.”

For last week, the cutout slipped a bit. The Choice cutout fell 73 cents over the course of the week to close Thursday at $262.40 and the Select cutout lost $2.86 to close at $255.26. Gottschalk talked about moves in the cutout as a litmus test for consumer demand and price resistance.

“A consistent 575,000 production level for over a month is the only reason that the cutout values were able to maintain this drive and these price levels. Now if these prices slip on their own without a corresponding increase in production, it is the first sign that price resistance at the consumer level is taking hold. The severity of any price correction in the cutout will alert us to such a factor. For now, more weakness is expected. The grind market still provides the overall support for the cutout value. As retailers raise these prices, consumer response must be monitored.”

The price of ground beef relative to muscle cuts is something that is attracting more attention at the meat case. Anecdotally speaking, members of the WLJ production staff who don’t follow the markets were commenting energetically on local Denver prices. Ground beef at local grocery stores is easily $4.99 per pound for basic grinds—more for value-added offerings—while some sirloin and roast cuts have been found in the $3.85 per pound area.

The market got very bearish in more ways than one last week. Announcement of Russia’s food import bans hit the market like a clawed paw to the chin and sent the markets tumbling. Live cattle futures closed close to or at limit down across most of the board.

“Aggressive long liquidation and technical selling are being blamed on demand fears and outside markets to some extent,” reported DTN’s John Harrington mid-day on Thursday. “Uncertainty in Ukraine and Russia’s threat to block meat imports may also be factors.”

Gottschalk pointed out that the movements of Russia are fairly irrelevant to market fundamentals, making the severe kneejerk reaction little more than pure emotion.

“The ban from Russia on specific ag products as retaliation for EU, U.S. and allies’ sanctions will prove to have minimal impact on the Russian economy and even less on ours. U.S. beef exports to them are limited to mostly livers.”

Still, market moves are market moves, regardless of what they are based on.

Over the course of the week, the August contract shed $1.75 to settle Thursday at $155.55. The August contract settled limit down, meaning that additional gains made earlier in the week were consumed in that single day’s short trade. Similarly, the October contract was just a nickel shy of limit-down trade on Thursday, posting a weekly loss of $3 at $153 at close of trade.

Gottschalk had noted early in the week that a trend reversal would be signaled by the markets closing below the prior week’s lows. That appears to have been achieved in last Thursday’s panic. It has yet to be seen if the panic will be corrected or will be the beginning of that predicted reversal.

Feeder cattle

Cash feeder trade was mixed last week with several markets calling their sales down compared to the prior week’s sale, while others boasted prices on feeder calves being up as much as $10. There was a noticeable decline in the number of benchmark medium and large 1-class (#1) steers of fered in the 700-800-lb. weight range.

California: At the Cattlemen’s Livestock Market in Galt, all classes of cattle were called steady. However, offerings of #1 steers were limited with animals from 400-700 lbs. being available in that class. Sixweights ranged from $225- 261, but there were no 7-weights to quote.

Iowa: Cattle sales across Iowa normalized last week with recently established volumes. Benchmark steers sold in the $229-254 range with averages hovering in the $230s.

Kansas: At the Winter Livestock Feeder Cattle Auction, receipt volumes were steady with the prior week, but the offering of #1 feeder cattle skewed towards heavy animals. As such they were called weak to $5 lower on comparable sales. A load of 763-lb. #1 steers sold for $224.50.

Missouri: At the Joplin Regional Stockyards, volumes were up notably. Feeder cattle of both sexes were called steady on comparable sales. Prices for #1, 7-weight steers ran $212- 236 with a dozen calves selling at $218.

New Mexico: Offerings were tight at the Roswell Livestock Auction, but feeders were called up $7-9 nonetheless. A quartet of steers averaging 739 lbs. brought in $198.50. The situation was similar at the Cattleman’s Livestock Auction in Clovis, where lighter feeder steers and heifers were up $6-10. Those over 600 lbs. were called steady. There were only seven 7-weight, #1 steers sold, going for an average of $210.88.

Oklahoma: At the National Stockyards, feeder steers were called up $2-5, while heifers were lightly tested. Calves were called up $6-10—this all despite a quality description of “plain to average.” Benchmark steers fetched $215-234.84, with calves bringing up the rear despite gains. At the El Reno sale, feeders were called steady with calves up $6-8 on limited offerings. Prices on benchmark steers ranged from $213-234.75 with calves again setting the base.

Texas: The Amarillo Livestock Auction sold a few more head last week compared to the prior week, but the volumes were still too low for sales trends. Higher undertones were reported. There were no #1 cattle offered, and among the few medium and large 1-2 class cattle, there were no 7-weights. Three head of 6-weight calves sold at $215, while three head of 8-weight yearlings sold for $201.

The feeder futures were shut down last Thursday in reaction to the announcement of Russia’s food imports ban. Trading in contracts out through January 2015 went limit down early in the morning. The March, April and May 2015 contracts flirted with limit down, but stayed open, though volumes were understandably low.

Over the course of the week, near-term contracts lost about $2 each, with all of that coming from Thursday’s break that ate up the minimal gains made earlier. By close of trade Thursday, the August contract settled at $218.33, a $1.94 loss, and the September contract settled at $217.73, a $2.17 decline.

“Extremely bearish action here is mirroring the price implosion in the live pit,” explained Harrington Thursday afternoon. “For the moment, neither lower corn action nor the substantial premium of the cash index is lending would-be bulls any courage.”

CME seeks comments

CME recently announced that it is seeking stakeholder comments on proposed changes to the trading hours cattle and hogs contracts.

“We have received a number of requests asking for the re-examination of the CME Globex trading hours for Livestock products: Live Cattle, Feeder Cattle, and Lean Hog futures and options,” reads the CME announcement. “Accordingly, we are reviewing CME Globex trading hours for Livestock to ensure their alignment with customers’ needs.

To this end, we invite customers to provide feedback about their preferences for CME Globex Livestock trading hours. All CME customers and those who access CME Livestock prices are encouraged to participate.”

Comment submission comes in the form of an online survey at: https://jfe.

qualtrics.com/form/ SV_8nT6lJw36oSJtEp and comments are being accepted through Aug. 19. Questions can be directed to the following representatives from CME:

Tom Clark, Agricultural Products Business Line Management, 312/930-4595 Jack Cook, Commodity Research and Product Development, 312/930-3295 Matt Herrington, Commodity Research and Product Development, 312/338- 2787 CME pointed out that all responses will be kept confidential and neither individuals nor firms will be identified.

Analysts Steve Meyer and Len Steiner of the CME Daily Livestock Report urged anyone involved with the futures market to participate in the comment period. — Kerry Halladay, WLJ Editor

 
 


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