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Monday, May 5, 2014

Futures take off higher

by Kerry Halladay, Associate Editor

Cash trade was slow to develop again last week, but when a little trade happened on Thursday, the numbers were a surprise. With a little over 7,000 head sold by Thursday afternoon, prices were steady to up $5 compared to the prior week with steers selling live at $148-150. Dressed trade was mixed, being both $2 down and $3 up at $233-238 compared with prior week’s $235-236 dressed prices. Though the volumes were light with expectations of the rest of trade being completed Friday, the prices reflected the aggressive gains seen in the live and feeder futures markets.

After doing very little most of the week, live cattle futures apparently decided they didn’t want to be left out of the rocket rally party. On Thursday trade alone, all contracts remaining in 2014 gained over $2, and the February 2015 contract wasn’t far behind. Volumes were also quite respectable (over 71,000) and at a level not seen much lately.

By Thursday afternoon, all the near-term contracts had closed up for the week. The April contract left the board on Wednesday, settling at $145.83, up 83 cents over the week compared to the prior Friday. The June contract gained $2.48—of which $2.05 came on Thursday—over the week to settle at $139.25. The August contract gained $2.98 over the course of the week with a Thursday settle of $138.58.

Vetterkind had speculated earlier in the week that June would have to close above $138 “for the market to make another run higher.” That seems to have come to pass, at least for now.

“Even pressure in boxed beef values was unable to limit futures buyer support following the first of the month,” reported Rick Kment, DTN market analyst on Thursday. “This is expected to help draw additional technical support into the market over the near future, although traders still will be subject to the ability for cash and beef prices to find support at the end of the week.”

Packers finally got back to the black last week as per-head margins went from a loss of $12 to a profit of over $24 by Thursday. How long that will last has yet to be seen, however. By the end of last week, cutout values had dropped and expectations for increased production schedules were being voiced.

“Production this week is set to exceed 600,000, up from our early week estimate of 590,000 head,” reported Andrew Gottschalk of Hedgers Edge on Thursday morning. The prior week was a 585,000 production week, while this week is expected to be at least 605,000 head. The markets have not seen a production rate over 600,000 head since 2013.

The May-time surge in domestic demand, and thereby cutout values among other things, has not yet been seen.

“Product values may stall temporarily prior to another surge into mid-May as Memorial Day pricing is completed,” said Gottschalk, predicting a following test of recent lows should be seen in July.

As mentioned, cutout values dropped last week.

Compared to their close on the prior Friday, Choice had declined $2.04 to settle at $230.34, and Select had lost 66 cents to settle at $220.98. Much of this relatively small decline was attributed to retailers “playing it close to the chest” in terms of beef procurement. Weather has impeded the start of the grilling season in many places, but it is expected just around the corner.

Feeder cattle

“The sharp contraction in available feeders and calf supplies outside feed yards will limit selling pressure and placements in the coming months,” noted Gottschalk early last week in response to the smallerthan-expected placement numbers in the most recent Cattle on Feed report.

For last week at least, “limit selling pressure” translated to “stoke already hot markets.” While cash feeder prices in the $160s have been something of a distant memory in past weeks, feeder auctions have been upping the ante; most prices were solidly in the mid-$180s for medium and large 1-class (#1) feeder steers in the 700-pound range.

Iowa: Many thousand head of cattle sold in Iowa’s collection of sales. In the Bloomfield Feeder Cattle Auction, feeder steers were called $3-8 higher. Heifers over 450 lbs. were up $3-4, with those over 600 lbs. going for $10 more. Prices for #1, 7-weight yearling steers ran a wide gamut, anywhere from $176.75-205.50.

Most averages were in the mid- to upper-$180s.

Kansas: At the Winter Livestock Feeder Cattle Auction of Dodge City prices were also on fire. Feeder steers over 700 lbs. sold $3-4 higher, while heifers were up $2-3. A light test of calves sold up $3-5. Sevenweight, #1 yearling steers sold between $173.85- 188.75.

Oklahoma: The El Reno Livestock Market saw good sales volume on very good demand. Feeder steers were up $3-5 with prices favoring cattle over 900 lbs. and heifers were up $4-6. Prices on #1 yearling steers between 700-800 lbs. ranged from $177-190, though average prices were in the low $180s.

Feeder futures were spectacular last week. On Thursday alone, all but one 2014 contract closed limit up with the straggler, May, not being far behind. The May contract gained $3.95 over the course of the week, with three-quarters of that coming on Thursday, to settle at $183.75. August gained $5.86 to close Thursday at $190.48, and September gained $5.85 to close at $190.98.

“Feeders remain on a tear and show no signs of slowing down,” noted Vetterkind.

Though not often discussed here, outside markets always can meddle with the beef and cattle markets. One of the more talked about news snippets on the global economic front last week was the claim that China’s economy will soon outstrip that of the U.S. Gottschalk took a moment to address that talking point with a bit of perspective.

“Headlines read that China’s economy will surpass the U.S. this year.

What you are not being told is that this calculation is based on what economists call ‘Purchasing Power Parity.’ In short, if you believe a water buffalo pulling a plow is equal to a John Deere tractor pulling a plow then you believe this is parity. The reality is that China’s economy is slightly more than one-half the size of the U.S. economy measured in current dollars.” — Kerry Halladay, WLJ Editor

 
 


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