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Monday, March 24, 2014

Packers need cattle for the grilling season

by Kerry Halladay, Associate Editor

Cash fed cattle trade was slow to develop last week, but by Thursday afternoon a light trade had taken place at $150 live and $240 dressed. These prices were mostly seen in the Texas Panhandle and Kansas. Comparatively, the prior week had seen prices at $148- 148.50 live in the region and $240 dressed in Nebraska, making sales a dollar plus higher for live.

“Packers bought a fair amount of cattle last week,” noted Troy Vetterkind of Vetterkind Cattle Brokerage last Thursday. “But they are working through them this week as the weekly kill is running 17,000 head above last week.” He speculated that the bulk of cash fed cattle trade would take place Friday following the release of the March Cattle on Feed report. Roughly 12,000 head had been confirmed sold throughout the week by Thursday afternoon.

With expectations last week of a larger production run—572,000 head versus the prior week’s 564,000 head—and the combined impetuses of positive packer margins to capture plus anticipation of improved demand for grilling items, packers will likely need to gather larger amounts of cattle around them in the coming weeks. Export business and the tight supplies of grinding meat are also fueling packer desires to own cattle. That said, product values have topped, according to Andrew Gottschalk of Hedgers Edge, and are heading down.

Over the course of last week, the Choice cutout grew a slight $1.13 to close Thursday at $241.57. While this was a net gain for choice, the Thursday close was a distinct loss compared to levels achieved earlier in the week. Select lost $1.73 to settle Thursday at $234.77.

With falling cutout values often comes decreased packer profit margins—currently estimated at about $30 per head—and decreased retail prices for consumers. However, that latter option may not be the case for a while. Gottschalk noted an odd detail in the interplay between cutout values and retail prices in the past months.

“An interesting twist occurred with retail beef prices for January as the initial average price at $5.25 was revised downward to $5.04. This would help explain the continuation of good retail movement during that period. The February average price is now estimated at $5.28 versus $4.91 a year ago. Ground beef is reported at $3.56 versus $3.38 a year ago. What price levels can a $5.28 retail beef price support? This price can support a composite cutout at $218 with an extreme level of $2.28. The latter price level would prove to be short live unless retail beef prices rapidly advance to $5.50 per pound. The February average price at retail can support a max fed cash price at $145. Advances beyond this level would necessitate additional advances in the retail beef price. A $150 average cash price would eventually force retail beef prices to $5.50 per pound to restore retail margins.”

Gottschalk summarized his point, saying that the current fed cattle prices have yet to transfer fully to the retail setting. “Consumers have not had to face the reality of retail beef prices that would reflect current fed cattle prices.”

While consumers may not have been forced to face the music yet on beef prices, they may not be interested in the concert to begin with, at least with steak. According to the March FooDS (Food Demand Survey) report out of Oklahoma State University, consumer willingness to pay for steak dropped over 5 percent. Fewer respondents to the survey said they expect beef prices to rise, but fewer respondents also indicated they plan to buy more beef in the coming weeks. By contrast, more respondents indicated they are more willing to buy pork and ham.

A hopeful note from the FooDS report, however, was that respondents indicated a greater willingness to pay for ground beef. The grilling season is getting underway in many areas across the country and the burger is the American staple on the grill. Cull cow prices and trim markets bear out this demand.

“Trim markets remain at all-time record highs on tight supplies and the need for processors to procure inventory to grind,” Vetterkind pointed out early last week.

Indeed prices for 90 percent trim and the cow cutout rose roughly $3 last week. Ninety percent trim gained $3.12 to close Thursday with an estimated value of $265.37 and the cow cutout gained $2.80 with a Thursday afternoon estimate of $203.72.

Whether or not the increased demand for ground beef will balance out the decreased interest in steaks has yet to be seen, but one thing is for sure: exports are shining.

For the week of Mar. 7-13, exports of 14,600 metric tons represented a marketing year high, up 10 percent from the prior week and up 21 percent from the prior four-week average. Primary destinations were Japan, Mexico, Hong Kong, South Korea and Canada. Export sales were described as brisk by Vetterkind.

Live cattle futures lost the stage last week as the near term contracts shed value rapidly between last Wednesday’s close and Thursday’s close. When looked at from a weekly movement perspective, the losses weren’t so bad—down 82 cents to settle at $144.43 for the April contract and down $1.65 to settle at $136.20 for the June contract—but when one considers the highs seen on Wednesday, the losses get considerably larger. Wednesday saw near-term contracts close at $146.13 and $138.28 respectively.

“When most live contracts gapped higher at the opening and quickly went on to score new highs, it looked like bulls were in full control of the trading day,” described John Harrington, DTN’s market analyst late Thursday afternoon.

“But as spot April neared $147, profit taking, spec selling, and commercial hedging interest seemed to come out of the woodwork. When the smoke cleared and despite reports of greater packer spending in the country, nearby April and June finished close to 250 points below highs of the day, suffering negative key reversals in the confusing process.”

Feeder cattle

For the most part, feeder cattle markets were up as pastures green up and cattle feeders want stockers to put out on grass. Prices for medium and large class-1 (#1) steers remained in line with prior weeks’ higher ranges.

“Until we begin to see some sort of weakness develop in the cash fed cattle market, cash feeders are going to remain firm. Even then though, feeder cattle numbers are going to get seasonally tight once we get through the spring wheat run and that’s going to keep the market from falling out of bed,” observed Vetterkind.

California: Beef steers weighing between 600-800 lbs. at the Escalon Livestock Market stayed steady at $145-185. Holstein steers also remained steady with the prior two weeks at $100- 120. The Turlock Livestock Auction Yard said, despite dry and windy conditions, the market continues to be very good. Seven-weight beef steers sold between $150-172, while Holstein steers sold up on the lower end of their range at $90- 115.

Iowa: At the Iowa Feeder Cattle Auction in Russell, 3,540 receipts were collected. Compared to the previous comparable sale, feeder steers were called up $3-7, while heifers gained a spectacular $20-25. Trade was called very active on very good demand. A large group of #1, 7-weight calves sold for $181.96 while some yearlings sold for $177.18.

Kansas: The Winter Livestock Feeder Cattle Auction of Dodge City sold about half the number of cattle it did the prior week. Despite that, heavy steers were called steady to up $3 while similarly weighted heifers sold steady to up $2. Yearling #1 steers in the 700-pound range sold the full range of $170s.

Oklahoma: At the OKC West-El Reno sale, receipts were a bit light at 6,633. Steers were said to be $3-4 higher with prices up $6-8 for grazing-worthy cattle. Heifers were up $1-2. Too few calves were offered for a trend. Prices on 7-weight #1 yearling steers ranged from $172.55-180.76.

Washington: The Stockland Livestock Auction in Davenport had light receipts for its usually small sale. Stocker and feeder cattle were called $4-6 lower on slow trade. Slaughter cows and bulls (cows making almost half of the total offering) were up $1-4 on good demand. There were no #1 steers offered, but five head of 760-pound yearling steers in the medium and large 1-2 class sold for $160.

Like near-term live futures, near-term feeder contracts (and more so for the more deferred contracts) took a hard nose-dive between Wednesday and Thursday. On Thursday’s settlement, the April through September contracts of 2014, and January 2015, saw one-day losses of $2 or more, and the contracts in between were over $1. Only the March contract got away with less than triple-digit losses with $173.63, down 77 cents from Wednesday and down 97 cents from the prior Friday close. The April contract lost $2.58 over the course of the week ($2 of that on Thursday alone) with a Thursday settlement of $174.65.

“Following the ugly pattern of reversal set in the live pit, feeders imploded with triple-digit losses,” described Harrington.

Livestock Slaughter

The March Livestock Slaughter report, documenting details on cattle slaughtered through the end of February, was released last Thursday. It showed total cattle slaughter down 5.2 percent year-to-date (combined January and February) for 2014 at 4.84 million head. That number of cattle produced an estimated 3.87 billion pounds of federally inspected beef through the end of February, down 4.9 percent from the same time in 2013.

The combined January/ February breakdown by class has steers representing almost half (49.5 percent) of total cattle slaughter. This is up from the 48.7 percent of 2013’s January/ February cattle slaughter made up of steers. Both heifer and beef cow slaughter percentages decreased during the timeframe as well, at 28.7 (versus 29.1) percent and 9.7 (versus 9.8) percent respectively. — Kerry Halladay, WLJ Editor

 
 


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