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Monday, April 28, 2014

Cutout values surge on cut production

by Kerry Halladay, Associate Editor

Following the prior slow and low cash fed market, last week’s cash fed trade was again slow to develop. One analyst claimed the reluctance of packers to buy cattle was something of a standoff with cattle feeders, the market, and reality.

“Packers are trying to lay in the weeds and say they have enough inventory around them and that domestic beef business has yet to pick up seasonally,” reported Troy Vetterkind of Vetterkind Cattle Brokerage. “This may be true to a certain extent but they do have first of May beef orders to fill and export orders have been robust lately.”

He opined that the cash fed market would be no worse than steady with the prior week’s $145-147 live and $238-240 dressed unless the futures board was to crash. By Thursday afternoon, that had not happened, though the upward action wasn’t spectacular.

From Thursday to Thursday (Friday, April 18 was Good Friday and the CME was closed for the holiday), the April live cattle futures contract gained all of 5 cents to settle last Thursday at $144.25. The June contract on the other hand gained $1.48 to settle at $135.85. Vetterkind blamed the lackluster activity on the sluggish cash fed market.

Andrew Gottschalk of Hedgers Edge gave an interesting historical perspective on live cattle futures and the cash fed market.

“The widest positive cash basis recorded at the beginning of May occurred in 2003 at a 7.3 percent cash premium to June futures. At the current June futures price level this would equate to a $10/ cwt premium, cash over June futures. Since 2003 the most positive cash basis versus the June futures is 4.7 percent. This would equate to a cash premium of approximately $6.25/cwt in early May.”

Some of the packer reluctance to buy fed cattle could have also stemmed from their continuing per-head losses that started the beginning of the week at $77 in the red, which then dwindled to $11 per-head losses by Thursday. Though packers get closer to the break-even point, continued losses in the face of the shortage-fueled rise in cutout values might still be keeping them conservative on inventory.

Over the course of the week, the Choice cutout value gained $7.45 to settle at $233.80 Thursday afternoon. Select similarly gained $6.84 with a settle of $222.07.

“Given the voracity of the move off the lows, we cannot rule out the idea that the cutout value could test the all-time high levels moving into the middle of next month,” said Gottschalk. “Factors and momentum are lining up that make that prospect a distinct possibility as we enter this very strong demand period.”

But Gottschalk also warned that the gains in the cutout so far have come from reduced production, not better retail demand.

“Beef production during the first quarter posted the largest quarterly [year-toyear] decline projected for any quarter this year. As such, fed cattle values recorded their largest quarterly average [year-to-year] price advance for the year.”

Last week was estimated to be a 575,000-590,000-head production week, one of the highest estimates in recent memory. This compares to the prior week, which had a 568,000-head production rate.

But there are still expectations for domestic demand increases to come with the warmer weather.

“The best demand period of the year for beef product lies just ahead of us,” said Gottschalk. “May-June are usually stellar consumption months; given the weather in the consuming areas this past winter, the consumers there may respond with even more pent-up desire to be outside in the sun with the grills going.”

Vetterkind, however, pointed out that we aren’t there…yet.

“Major buyers of beef remain very cautious in their near-term procurement of beef and still cite they want to see better consumer pulls at retail before making any further commitments.”

On the other hand, he did note Thursday morning that cash beef markets are being led higher by ribs, ground product and briskets while the rest of the beef complex is holding steady.

Feeder cattle

Cash feeder cattle prices are still going strong across the country and last week that strength was said to have buoyed the feeder futures rally. Reports of sales on medium and large 1-class (#1) steers varied more widely than in past weeks, but prices in the $180s, $190s, and even $200s were not uncommon.

California: At the Cattlemen’s Livestock Market, most cattle offerings were called steady, with the exception of feeder cattle under 700 lbs., which were called steady to down $3. Sevenweight, #1 steers sold between $170-193. At the Turlock Livestock Auction Yard, several thousand head sold, with benchmark beef steers selling between $160-198.

Kansas: At the Winter Livestock Feeder Cattle Auction in Dodge City, over 2,000 receipts were collected. Feeder steers over 700 lbs. were called firm to up $1, while particularly heavy feeders were up $2-5. Limited supplies of lighter weight animals made it hard to quote trends, but generally they were called steady. Numerous lots of 7-weight, #1 steers sold between $178-184.45, with the upper end going for value-added lots.

Nebraska: At the Bassett Livestock Auction, over 3,000 receipts were collected. The most recent prior sale was too far distant for a market trend, but demand was said to be good for all offerings though with light attendance. Benchmark steers sold in the range of $174- 188.78. At the Huss Platte Valley Auction, almost 3,900 receipts were collected. Feeder steers under 850 lbs. sold

down $2-5, while those over sold steady on a light test. Seven-weight, #1 steers sold between $172-198 with 50 head of 709-pound, thin-fleshed yearlings fetching the top price.

Washington: The Stockland Livestock Auction, Davenport, collected 865 receipts last week, well above that of the prior week’s sale. Stocker and feeder cattle were called steady to $8 higher on very active trade and good demand. Slaughter cows and bulls were $2-5 higher. Only 10 head of 7-weight, #1 cattle were reported, but prices ranged from $163- 171.50.

As mentioned, the feeder cattle futures did well last week. The April contract left the board at $178.52, the prior Thursday’s close before Good Friday, and both the May and August feeder cattle contracts gained nicely.

From Thursday to Thursday, the May contract gained $1.55 to settle at $179.60 and the August contract gained $2.65 to settle last Thursday at $184.05.

“The feeders don’t look quite so negative technically,” said Vetterkind, comparing them to the somewhat sideways activity in the live futures. “But I have to assume that if live cattle continue to under-perform, feeders are going to have a hard time extending much higher. I still view May feeders as having support at $177-178 and resistance at $180-181. Same with August feeders having support at $180 and resistance at $183-$184.”

Cold Storage

The monthly Cold Storage report was released last Tuesday. All meat (red meat and poultry) in all warehouses as of March 31 had declined from 2.21 billion pounds on March 31, 2013 to 1.94 billion pounds this year.

Beef in cold storage declined, both in real volumes as well as proportion of total meat in storage. Last year, stores of beef amounted to 511.23 million pounds, representing 43.3 percent of total stored red meat and 23.1 percent of all meat in cold storage. By comparison, this year’s stores of beef stood at 404.75 million pounds, representing 40 percent of stored red meat and 21 percent of the total meat stores.

Vetterkind noted that the March 2014 drawdown of beef stocks were just 1 percent below February, but down 21 percent compared to March 2013.

Pork in the nation’s coolers declined in real volumes— from 647.78 million pounds last year to 575.22 million pounds this year—but grew in terms of its proportion. Pork in cold storage this year represented 57 percent of red meat and 30 percent of the total stored meat, compared to last year, where it stood at 54.8 and 29.3 percent, respectively.

“Total pork stocks were reported at 575.2 million lbs. which would be 12 percent below February and 11 percent below a year ago. The drawdown in pork stocks was the largest ever for the month of March,” reported Vetterkind. — Kerry Halladay, WLJ Editor

 
 


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