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Friday, August 8, 2014

A Russian reaction

by Pete Crow - Publisher

These cattle markets continue to amaze me. The cattle futures took a dump last Thursday with nearly all feeder cattle contracts down the $3 limit in early trading. The live cattle contract wasn’t hit as hard, but suffered. The managed money—the speculators— heard that Russia was going to ban ag imports for one year in retaliation to the UN sanctions placed on them for their bad behavior. The irony is that the U.S. doesn’t sell that much beef to Russia anyway; we’ve been held out of that market since 2013. Politics and fund managers do pose a risk to these cattle markets.

 

Fed cattle looked like they were going to trade at $164-165 last week and I’m sure that feeder cattle buyers will step back and see how this Russian situation works out before they jump back in the market. It looks like the market has found a comfortable trading range but there is still a lot of risk for the cattle feeder. Let’s hope the traders and speculators don’t get too nervous and emotional over this insignificant Russian reaction.

The July 1 Cattle on Feed report showed placements 6.3 percent lower than last year, which should be no surprise. However, the weights of those placed cattle shifted away from the heavy end. It appears that calf feeding may come back into vogue. Cattle smaller than 600 lbs. were 27 percent higher and the 600-700-lb. cattle were higher by 8.4 percent. All other weight classes were down.

The corn market looks like it has settled down as well; it has been in a free fall for the past six weeks and has now settled at the $3.60 level. This will certainly put a pinch on corn farmers. There has been some speculation that corn farmers are going to start feeding again. Andy Gottschalk at Hedgers Edge said, “We believe the invisible supply of cattle on feed, which doesn’t get reported, is posting even larger year-over-year gains in the Corn Belt feeding area.”

He also suggests that July placements may be double-digits below a year ago.

One element of the market that he is keeping an eye on is carcass weights and they are now in record territory suggesting that feeders are holding onto cattle longer. He is concerned that feeders may develop a backlog of fed cattle, but even if they do, the supplies are still in favor of a stable market through the fourth quarter.

It looks like the flurry over ground beef supplies has slowed. Trim prices have settled down and the 90 percent lean is trading at $293.85 and the fifty percent trim is at $149.54. The Choice cutout is trading around $260 with some good volume. Retailers have started to push ground beef prices higher and test consumer demand again. Ground turkey has shown some increases recently indicating a consumer shift to lower priced meats.

The packing industry has definitely found a comfort zone processing around 575,000 head a week. Managing demand against beef production is a tricky job. Last Thursday’s packer margin index showed them earning $37.05 a head on an average fed cattle buy of $163.09.

Cattle supplies are tough on these packers. Last week Cargill announced they will close their cow processing facility in Milwaukee and L & H Packing in San Antonio, TX, closed their doors, both without much warning to their employees.

The corn reports are starting to come in fast. Doane Advisory Services forecasts U.S. 2014 corn production at a record high 14.443 billion bushels (bb) with an average yield of 172.3 bushels per acre (bpa), following its annual crop tour.

“This is clearly the best corn crop we have seen in our rather long history of crop tours,” the firm said in a note to clients. Doane has conducted its Midwest tour for 31 years.

The St. Louis-based firm’s estimates are above the USDA’s current forecast for corn production at 13.860 bb with a yield of 165.3 bp. The USDA plans to issue updated crop forecasts on Aug. 12.

Last Thursday’s futures trading was like hitting a speed bump and reminds us that they can go down quickly. However, I would call this Russian deal an emotional over-reaction by speculators but it does expose the emotional aspects of a market, despite the fundamentals. — PETE CROW

 
 


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