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Friday, January 24, 2014

Markets gone wild

by Pete Crow - Publisher

It was another wild record-setting week in the cattle and beef markets. The boxed beef cutout values moved over $240 on Choice product and $237 on Select trade volume was called moderate. Packers had to come to terms with paying as much as $150 for live fed cattle in the north and $239 for dressed trade. Cattle futures moved $3 higher for the week putting the February contract at $143.67. Cattle sellers are eager to sell with the cash premium.

Packers all but threw up their hands in despair two weeks ago at $143 but were lucky enough to walk into a stronger than expected beef market, pulling their margins up out of the red. The packer margin index showed packers were earning $125 per head at mid-week. With those kinds of margins, they will be happy to pay the $150 for fed cattle and process as many as they can sell. This is one of those rare times when everyone in the cattle and beef business is making good margins.

Thursday markets settled down as the cutout pulled back a couple dollars, perhaps signaling the end of the historic rally. It would appear that we have taken the beef into a new trading range and buyers are going to have to get used to a cutout that will trade between $2.20 and $2.30. But I would say that the new floor would be around $2.15, which will easily support a fed cattle market of $130 to $140. Many observers expect to see the cutout decline $10-$20 over the next few weeks.

Steve Meyer at the Daily Livestock Report said, “Just about everyone we have spoken to seems to think that the market is overdone and will not be able to sustain these gains. And this in itself is part of the problem; beef buyers were caught flat-footed in this market and when you don’t believe the rally, you tend to wait and hope for the break. What that does is that, in the short term, it tends to further fuel the spike. If last week you had to buy one load and you waited, this week you have to buy two and are even more desperate than the week before. Also, there is a tendency to plan based on last year’s performance and retailers remembered when beef prices dropped sharply between January and March of 2013. For now everyone is looking to see how high is high in the beef complex.”

It’s interesting to note where the strength in the cutout is coming from. The chuck primal has made the most significant gains. Last year at this time, the Choice chuck primal was trading at $166.24 and this year as of last Thursday it was $241.33. Round cuts have had significant gains as well; a year ago prices show the round primal trading at $174.65 and now they are trading at $244.19. That’s a 40 percent gain in value.

The beef trim markets are also a major contributor to the cutouts new highs. Fresh 50 percent beef trimmings are in high demand, but not at record levels, which was $127.45 set November 15, 2011. Last year at this time, fresh 50s had an average price of $69.61 and were trading at $114.33 last week. Lean beef to blend with this trim is in high demand and should remain that way for the year. It is reported that China has become a major player in New Zealand and Australian markets and has dramatically reduced available supplies from that region.

The deferred months on the live cattle contracts don’t show any support for this market going past February. Fed cattle supplies are anticipated to grow coming into April and May. However, the feeder cattle contracts are all at a steady $169 or so all the way out to November, 2014, which tells me there will be consistent good demand for a while to come. Placements of feeder cattle into feedlots will remain at below year-ago levels.

Meyer also said, “Feeder cattle supplies remain limited and feedlots were quite aggressive during the fall months. For the period between September and November, cattle placements were 58,000 head larger than a year ago. That kind of increase is not sustainable and placement numbers are expected to stay low for the next few months. A small calf crop in 2012-13 and a growing impetus to expand the herd will tend to limit the number of cattle available for placement this year and very likely next year, as well.”

Herd expansion won’t happen soon. While some regions are trying to expand their herds, much of the country is in continued drought, especially in the far West. Pre-report cattle inventory estimates are suggesting total cattle numbers will be down two percent, total beef cows down 1.6 percent, and the only bright spot is replacement heifers will be up 3.3 percent. We still have a long way to go to take care of our supply problems, so prices should remain high for a while. Maybe not as high as they are today, but a solid market is still forecast. — PETE CROW

 
 


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