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Monday, August 25, 2014

Prices continue to fall

by Kerry Halladay, Associate Editor

As with the prior week, cash fed trade developed earlier than usual last week. A trickle of trade began Tuesday with Wednesday seeing the majority of trend-setting prices. Trade on Thursday was in clean-up mode as almost 70,000 head were confirmed sold week-to-date. Prices ranged from $151-153 live and $240-242 dressed with steers and heifers being almost indistinguishable in prices. This was down from the prior week’s $154-156 live and $223-245 dressed prices.

It’s hard to point specifically at one cog in the market machine and say, “That’s why X is lower” when all the cogs are turning in a downward direction. Cash prices were down, futures were down, product values were down, demand may be down slightly on the short term—though on the longer view, demand is still amazingly high— and, of course, supplies are down. That last detail and a subset of demand appeared to be one of the only gears holding the rest of the machine from speeding downwards faster.

Production for last week was estimated at 580,000 head following several weeks of production hovering around the 575,000 head area, a level Andrew Gottschalk of Hedgers Edge has worried will negatively affect the “currentness” of the cattle supply.

“The marketing rate (number marketed/number of cattle on feed) remains too low. Weekly production is running short of expectations given the numbers of cattle on feed. Production last week [Aug. 11-15] was estimated at 577,000 head as packers continue to match production to demand.”

This artificial scarcity of beef relative to pipeline indications still hasn’t been enough to keep cutout values from falling and packers needing to give discounts on specific cuts that resist movement. Over the course of last week, the Choice cutout shed $5.08 to close Thursday at $250.46 and the Select cutout lost $7.56 to close at $240.82.

“Product continues to trend lower with the first level of support at $250 followed by support at $240- 242. Look for additional selling pressure ahead of the Labor Day holiday,” advised Gottschalk.

The star of the cutout in recent weeks—ground formulations and demand thereof—was not enough to hold up the cutout.

“Burdensome inventories of chuck and round meat to sell is forcing packers to offer discounts into a disinterested buying environment to find a clearing level and this weighs heavily on cutout values,” noted Troy Vetterkind of Vetterkind Cattle Brokerage. “Ground beef remains the best performer for the packer as steady/ higher price levels are still able to be achieved here as well. In all though, demand for beef except for ground beef remains on the defensive and this is expected to continue going forward.”

Supplies of imported grinding beef have increased slightly compared to recent weeks, but word from the dairy world suggests domestic supplies of dairy cows sent to slaughter might be tighter going forward than in the recent past. See below for more information on livestock slaughter.

Domestic demand for beef—both the American darling that is ground beef and grilling items ahead of Labor Day—have seen and will continue to see mounting challenges at the grocery store.

“The July average retail All Beef price was advanced to $5.56, up from the previous month of $5.51 and yearago levels of $4.96,” reported Gottschalk. “Retailers will continue to advance prices as the latest price of $5.56 will only support a $156 cash price. To reflect the record cash and cutout values, this retail price series needs to advance additionally to $5.75.”

Fed cattle futures slipped last week, though not as far as did feeder futures. Gottschalk called the market oversold and Vetterkind opined that the market is in “full liquidation mode by the hedge fund guys.”

Over the course of the week, the August contract lost $1.04 to settle Thursday at $149.56 and the October contract lost $2.20 to settle Thursday at $145.55. Like the feeder market—but to a lesser extent—the live futures saw yo-yoing trade giving and taking sizable changes from day to day.

“The cattle market is not a place to be long right now,” advised Vetterkind. “While we can get our mini-rallies, I believe those rallies to be selling opportunities or at least opportunities to do bearish things with options. Stick with put option strategies and roll them or adjust the position when given the opportunity.”

Feeder cattle

“It depends on what part of the country you are in and the quality of the cattle to determine if they were higher or lower but there did seem to be a definitive lower tone to the eastern feeder trade,” reported Vetterkind last Wednesday.

Prices were indeed depressed a bit last week from prior weeks, but the cash feeder market has not seen the extreme drop-off in prices one might have expected given its meteoric rise earlier this summer. Even after a couple weeks of stagnant or slightly declining prices, benchmark medium and large 1-class (#1) feeder steers weighing between 700-800 lbs. were still overwhelmingly above the $200 mark.

California: At the Cattlemen’s Livestock Market in Galt, they sold 1,463 head. Feeder cattle of all sexes and weights were called $3-5 lower. Seven-weight, #1 steers fetched between $200- 220.

Internet: At the time of publishing, Superior Livestock Auction was neck deep in its annual “Big Horn Classic” sale. Western 7-weight yearlings were bringing $219.50, while northern yearlings of the same class brought between $203-237. Southern 3-weight steer calves brought $370, while 7-weight yearlings brought $202-269. Full data was not available due to the sale being ongoing at the time.

Kansas: At the Winter Livestock Feeder Cattle Auction, feeder steers were called a weak steady to down $3, with heifers steady. Calves were only lightly tested but an “extremely higher” undertone was noted on the good quality offering. Seven-weight, #1 steers brought between $211.50- 215.

Missouri: The Joplin Regional Stockyards collected 4,570 receipts. Feeders of both sexes were called steady to down $5 with the greatest pressure being on middle-weight calves. Steer calves in the #1, 7-weight class were solidly $215, while yearlings ranged from $213-237.

New Mexico: At the Clovis Livestock Auction, receipt volumes were up. Feeder steers were steady to up $2, while heifers were up $4-7 despite the crash in the feeder futures on the day of the sale. Calves posted the lows in the #1, 7-weight group at an average of $197.34, but yearlings ranged from $200-219.

Oklahoma: Good volumes of cattle sold in the Oklahoma sales. At the El Reno Livestock Market, feeder steers were down $1- 2, heifers down $2-4, and calves were too lightly tested. Averages for #1, 7-weight yearlings were decidedly in the mid $210s, but a couple dozen “thin-fleshed yearlings brought $229. At the National Stockyards, however, feeders were higher.

Yearlings of both sexes were called steady to up $4 while calves were called up $4-6. Seven-weight, #1 calves ranged in the mid-$210s while yearlings ranged from $218.50-229.

South Dakota: The Sioux Falls Regional Auction sold feeders mostly steady last week with discounting on full-fleshed cattle. The few 7-weight, #1 steers offered were solidly in the low $230s.

Washington: Feeder and stocker sales trended higher last week at the Stockland Livestock Auction in Davenport. There were too few receipts at the previous sale for a more detailed trend quote. Eighteen head of 7-weight, #1 steers sold between $206- 214.

As mentioned, feeder cattle futures took a bit of a beating last week with more deferred contracts ceding dangerous value territory in some limit-down moves.

“I think the feeder market is beginning to liquidate,” opined Vetterkind last Wednesday. “Closes below $210 in front month feeder cattle would be pretty negative in my opinion. August probably doesn’t do it due to expiration looming at the end of the month, but September forward feeders are vulnerable.”

And vulnerable they were.

By the end of trade Thursday, the September contract closed at $209.43 (a $5.67 weekly loss) and more deferred contracts created a price stair-step downwards with each contract being a dollar or two lower than the one before. The August contract remained above the $210 mark quite easily with $215.20 (a $2.02 loss for the week). The October contract, which settled at $208.60 on Thursday, was below the level Gottschalk said was required to confirm the current downward trend reversal in feeders.

Livestock Slaughter and herd growth

The monthly Livestock Slaughter report came out last Thursday. The report showed that cattle slaughter for July was down 10 percent compared to July 2013, and beef production was down 9 percent from last year at 2.09 billion pounds commercial. The reason for the difference was an average live weight 18 pounds heavier this July when compared to last.

With 1.39 million head processed in July, steers made up an increasingly larger portion (54.3 percent) of the total 2.56 million head of cattle processed last month. Heifer slaughter this July compared to last was down slightly—27 percent compared to 28.3 percent— but declines in beef cows slaughtered was a more noticeable issue.

Overall cow slaughter (which includes dairy) made up 16.8 percent of total slaughter, while in July 2013 it was 18.4 percent. But dairy cows made up a larger portion of that this July than last, meaning beef cow (listed as “other cows”) representation was that much lower.

Other cow slaughter made up 7.8 percent of total slaughter in July 2014 with 199,000 head, compared to 9.6 percent in July 2013. But, as mentioned above, while dairy cow slaughter represented a larger portion of overall cow slaughter, raw numbers were still smaller at 232,000 head. This, of course, has impacts on the availability of grinding beef.

While the details of declining beef cow slaughter in the past months feed the fire of herd building hope with the minimal tinder needed to keep it going, there is more to rebuilding the herd than simply not processing cows. More heifers are needed and that is a slower process, and one that the current price of cattle is likely making much slower.

“The absolute cost to get into beef production today prices potential small producers out,” Robert Englehart with B E Cattle Company and retired USAF Officer told Steve Meyer and Len Steiner of the CME Daily Livestock Report. “I’ve been very successful in selling yearling Brangus heifers and bulls for $1,200-1,500. If you went to a livestock market you need to compete with the limited feeder supplies and have to shell out now $1,000 for every calf with no guarantee of reproduction!” Meyer and Steiner called this detail a very salient point often forgotten by analysts.

“Yes, the promise of profits is as big today as it has been in decades but the capital demands are also much more significant and only larger producers are set up to pour money in a larger herd,” they said. — Kerry Halladay, WLJ Editor

 
 


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