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Monday, March 10, 2014

Live futures see sharp downward correction

by Kerry Halladay, Associate Editor

Cash fed cattle prices drifted lower last week as the live cattle futures took a nose-dive and packers seized on the opportunity to buy cattle cheaper. Compared to the $150-152 live and $240 dressed prices seen in the previous week, last week saw the bulk of trade happen at $150 live and $237-240 dressed. By Thursday afternoon, over 47,600 head had been confirmed sold for the week with analysts not expecting any better for this week.

Andrew Gottschalk of Hedgers Edge credited this situation with the developing weakness in the product market and a positive basis.

“Given the positive cash basis, hedgers may be willing to settle for a steady cash trade this week,” said Gottschalk early last week. “As previously stated, only one year saw the monthly average cash basis during March greater than occurred last week. History is on the side of those willing to capture the current basis.”

Live cattle futures were a bit of a rollercoaster last week as the first half of the week saw them gaining nicely, only to see tripledigit losses on Wednesday and continued slight losses on Thursday.

At one point on Wednesday, live cattle were limit down, though by the day’s settlement, losses eased. This reversal was credited to the swift and aggressive advancement of lean hogs futures, which saw several consecutive days of triple-digit and at times limit up trades.

“Technically the price action in the cattle futures was pretty bearish and it took place on heavy volume with open interest going down, which doesn’t bode well,” warned Troy Vetterkind of Vetterkind Cattle Brokerage on Thursday, opining that the “line in the sand” for the April contract is now $143 and $134 for June.

“Unless the futures market can storm right back and negate some of yesterday’s bearishness, I would say that it reinforces this lower $150 live/$2.40 dressed area as a major resistance area for the cash cattle market.”

Despite the rather spectacular downturn, over the course of the week, the April contract lost almost $2 to close Thursday at $143.15, but the June contract actually gained $1.28 to settle at $135.48.

Similarly, despite talk of a slowdown or weakening in product values, over the course of last week both Choice and Select gained about $10. Choice closed Thursday at $235.58, up $10.25, and Select closed at $233, a $9.88 increase. Still, Gottschalk warned that product values are topping and the $234-235 area will be a point of resistance.

Much of the increase seen in product values and cut specific prices came from reduced supply rather than improved demand, as Vetterkind pointed out. End meat, loin cuts, and ground beef were leading prices in specific cuts as some areas of the country are flirting with grilling weather and others are still decidedly in stewing weather. But the reduced production schedules are to credit for this more than anything.

There is a potential relative catch to that developing, however. Last week started off with industry projections of a production week “challenged to exceed 550,000 head.” However, by the end of the week, projections had increased to 555,000 head. This came after the prior week, which had been estimated at 540,000-545,000 head, yet turned out to be a 570,000-head production week. A relative increase in slaughter rates—and a greater availability of beef— has the potential to keep a lid on product values.

Near-term demand sluggishness in the domestic market will add to this potential, as well. According to Gottschalk, March is typically the weakest demand month for beef. To add to this, Lent began last week, which impacts consumer demand for all meat, beef included.

But there is the opposing force of limited cattle and declining carcass weights to contend with, which are supportive of the cutout. Steve Meyer and Len Steiner of the CME Daily Livestock Report pointed out that, while overall average live and dressed weights are up very slightly compared to last year (0.8 and 0.6 percent respectively), that has more to do with the composition of cattle being slaughtered than actual animal weights. Fewer cows—which tend to be lighter—are coming to slaughter than in the past, meaning the make-up of cattle slaughter has more steers and heifers in the mix, skewing overall weights higher. That said, steer and heifer weights are generally down.

“Indeed, steer and heifer weights have been tracking below year-ago levels for much of the last two months, a result of a colder than expected winter, the removal of Zilmax as a feed ingredient and the tight cattle supplies in feedlots,” they said.

To add to this, a recent report out of Canada—a source of feeder and fed cattle for the U.S.—shows the Canadian cattle herd has declined with minimal replacement efforts going on.

“The January 1 cattle inventory in Canada was pegged at 12.215 million head, 0.7 percent lower than a year ago,” reported Meyer and Steiner. “While there has been some talk of herd rebuilding in Canada for the past two years, high feed costs, the implementation of Country of Origin Labeling in the U.S. and natural growth constraints have so far limited expansion. … Beef cow replacement heifers were pegged at 542,000 head, only 0.1 percent higher than the previous year and quite a bit lower than the peak replacement numbers in 2004 at 688,000 head. The Canadian cattle industry is today a lot smaller than it used to be and the latest data shows that beef supplies in Canada will remain constrained for the next few years.”

Feeder cattle

For the most part, sale volumes seem to be rebounding and demand is good for feeders, which mostly saw higher prices last week. Medium and large 1-class (#1) steers were more prevalent than in recent weeks, and those that were offered were mostly yearlings rather than calves. One interesting detail among the surveyed sales was the presence of notably more very heavy (800-1,000 lbs.) feeders being offered. Far Western states’ feeder prices seem to be catching up with those seen commonly in the Corn Belt and Southern Plain states. Perhaps people want feeders?

California: In the Escalon Livestock Market, #1 beef steers weighing between 600-800 lbs. were in the range of the rest of the country at $140-185. Comparable Holstein steers ranged from $100-120. The Turlock Livestock Auction Yard saw a very light test on beef cattle, but quoted Holstein steers in the 700-800 lbs. range as $78-118 on good out-of-state demand.

Colorado: The La Junta Livestock Commission Company Inc. sold all classes of steers at steady to $1 higher money. Heifers under 700 lbs. were up $2-4. Slaughter cows and bulls—which made up a quarter of the offering—were up $2-3 on good demand. Seven-weight #1 steers sold for $171-173.

Iowa: The Russell Feeder Cattle Auction collected almost three times more receipts last week than the week before with 3,466. Light feeder steers were called steady, while those over 500 lbs. were up $3-6. Light feeder heifers were up $5-10 while heavier heifers were only up $2-3. Buying was called active on very good demand. The relatively large volume of #1, 7-weight steers (both yearlings and calves) sold solidly in the upper $174 range.

Kansas: The Winter Livestock Feeder Cattle Auction of Dodge City, saw greatly depressed receipt numbers compared to the prior week (1,523 versus 5,097), but still was able to quote trends on feeders, which were up $3-5. Calves were too few for a market test, but trade was called active on good demand. The few #1, 7-weight steers sold for $174-180.

Nebraska: Huss Platte Valley Auction saw a steady to slightly smaller sale last week with 2,200 receipts collected. Steers sold mostly steady with the exception of 700-pound steers, which were up $4 and 850-pound steers, which sold down $2. Heifers ranged from steady to up $4. Seven-weight #1 steers represented roughly a quarter of the offering and sold between $172-182.

Nevada: The Fallon Livestock Exchange saw “the strongest buyer demand ever seen,” with feeder steers selling up $5-25 compared to their last sale. Beef steers between 700-800 lbs. sold for $146.50-164. Holstein steers over 600 lbs. sold for $70-80.

New Mexico: The Clovis Livestock Auction collected 2,130 receipts last week, better than the prior week but not as good as the same sale last year. Feeders under 600 lbs. were called steady to strong, while those over were steady to up $2. Heifer prices were called steady to weak. A few #1 steers between 700-800 lbs. sold, but to widely different prices with a group of 14 head of 712-pound steers selling for an average of $173.51, while 37 head of 771-pound steers went for $166.60.

Oklahoma: At the OKC West-El Reno sale, receipts were a little light at 4,300, though there were enough cattle sold for some trends. Yearling feeders of both sexes sold up $2-3. A higher undertone was noted on calves, but the test was too light for a proper trend. A large volume of 7-weight, #1 steers sold between $168- 177.

Texas: The Amarillo Livestock Auction collected 792 receipts with feeders of both sexes called steady on few comparable sales. Trade was active and demand moderate to good. There were no 7-weight steers sold, but #1 steers in the bookending weights of 651 lbs. and 810 lbs. sold for $180.92 and $160.50 respectively.

Wyoming: The Torrington Livestock Commission Co. saw 4,475 receipts collected last week. Compared to their prior sale, feeders of both sexes under 700 lbs. were $2-6 up while those over sold for $2-4 more. Demand was called good from a full crowd of buyers. Prices for #1, 7-weight steers ranged from $172-183.

As with past weeks, the feeder futures played second fiddle to the attention-grabbing action of the live cattle futures. They were playing a slightly depressed tune, with both near-term contracts shedding about 30 cents over the course of the week. The March contract closed Thursday at $171.40, and the April contract settled at $172.80.

“I think the line in the sand on March feeders now is $170 as a close below reinforces that highs could be in for a while,” opined Vetterkind. “We’ll see what happens here but I don’t doubt we run into selling now on near term rally attempts and need to be careful the funds don’t lighten up on their extremely overbought long position in the cattle market.” — Kerry Halladay, WLJ Editor

 
 


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