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Friday, August 22, 2014

Stabilizing the markets

by Pete Crow - Publisher

The scattle markets have become a little volatile over the past few weeks with live cattle topping out at $160 on the futures market, and just a few days later, dropping down to $148 on the August contract. The cash market traded at a $4 positive basis to the board, which appears to be narrowing. It’s funny how futures markets work, and it’s clear that the big speculator money decided to go short just after Russia decided to hold the U.S. ag industry out of their markets.

 

We all love the speculators when they are long and bullish, but we hate them when they’re short and scared. This summer’s cattle rally has presented a lot of risk for cattle feeders buying those $225 yearlings that will need a $170 fed market to break even. Two weeks before Labor Day generally produces a little rally in the market and a spike in slaughter volume, but packers seem content with that 575,000-head level.

Packers were able to purchase cattle a little cheaper last week at $151-153. The Cattle on Feed report that came out last Friday was expected to come in at 97 percent of last year’s level; placements were expected to be about 10 percent lower and marketings 9 percent lower than a year ago. I would say the funny money in the futures has been flushed out and this market should move higher. It has to because cattle feeders are $15-20 behind on their December cattle. The cover is gone and now it’s your raw nerve that will get you through it.

Feeder cattle markets have taken a tumble over the past two weeks, falling off a high of $223 on the August contract and cash feeders are down about $10 at auction markets. The deferred months have all dropped back below the $210 mark—still pretty darned respectable for the way this market rallied this summer. Cattle feeders certainly realized that buying into the $165 breakevens was taking a big risk. We touched $160 for a short time on fed cattle and many thought there was no limit to the market rally. But we found out differently.

The beef cutout values have fallen about $13 over the past two weeks with the Choice cutout at $250 last week and volume was actually pretty good at that trading level. Lean grinding beef has moved higher in anticipation of Labor Day weekend. The 90 percent lean was trading at $298 last week, about $5 higher than the week before. The slaughter cow market has been awfully good this summer with total cow slaughter down some 19 percent over last year. It will be interesting if that market holds through fall when slaughter cow numbers typically become more available.

Troy Vetterkind had a good perspective on the market last Thursday. “Whether we can see the cash fed cattle market stabilize next week will be the question on everyone’s mind as we close out the week. Show lists are likely to be steady but packers will be buying for a short Labor Day week kill. Seeming as how they have the futures on the run and there isn’t very much good news to report out of the beef market, I would say that there is better chance of being lower again as opposed to higher. The futures market is in full-on liquidation mode by the hedge fund guys and this likely lasts for a while longer so I don’t think cattle feeders will get much help there.”

It appears that credit for cattle feeders may be a bit of an issue. Jim Robb at the Livestock Market Information Center said that banks are holding the line on credit limits for some cattle feeders. It takes at least 60 percent more capital to operate these feedlots. And bankers are not expanding their credit, which he said is more of a bank regulator issue than the banks themselves. So cattle feeders will start having to use their own money to buy feeder cattle or buy fewer cattle... which could be a treat to the market.

How much can this cattle business grow? One would think that we’re in the growth phase of the market cycle when the nation’s cow herd should start to grow. But the mid-year cattle inventory report didn’t demonstrate any growth at all. Keeping replacement heifers is always a challenge and the tax code motivates more ranchers to buy them rather than raise them. So you should buy some replacement heifers to offset those high priced calves you sold. — PETE CROW

 
 


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