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Monday, May 19, 2014

Cash, live futures turn lower on disappointed May demand

by Kerry Halladay, Associate Editor

The tides are now fully turned. In the past, fed cattle were the stars of the cattle markets while feeders languished in the background. But now feeders—cash and futures—have the full limelight.

Cash fed trade was sluggish last week ahead of the release of the most recent Cattle on Feed report, but by Thursday afternoon, almost 24,000 head had been confirmed sold. Live cattle were trading $144- 147 with averages at $146.09 and $232-236 dressed, averaging $234.22. This is mostly down from the prior week’s cash trade at $146-150 live and $234- 238 dressed. Clean-up trade on Friday was not expected to be very voluminous nor significantly different in price.

These lower prices rested on a few things, but primarily the disappointment over the expected demand surge that didn’t happen. Other factors included packers cutting production rates and supposedly having sufficient inventory of cattle around them.

“Packers contend they have enough cattle inventory around them to cover this week’s slaughter schedules and point to continued slack domestic beef demand as reasons for not needing to be aggressive in the cash market this week,” reported Troy Vetterkind of Vetterkind Cattle Brokerage last Wednesday.

“Packers have been unable to raise product values to offset the cost of cattle amidst only two weeks of production above 600,000 head,” noted Andrew Gottschalk of Hedgers Edge. He pointed out that the prior week’s production stood at 597,000 head, compared with that week’s early predictions of a 610,000-head production rate. Last week started with expectations of a 595,000-head production rate, but faltered to 588,000 head as the week wore on.

“The lower production level may allow product values to stabilize temporarily.

The need to cut production to raise prices is never a good demand signal,” said Gottschalk.

Packer losses, estimated to be running in the $27-30 per head range, are also a concerning element for packers, particularly as the cutout fails to hold onto gains in the face of declining production.

“The dog-days of summer will arrive sooner than we all wish. The summer target price is $210 on the Choice cutout,” Gottschalk warned, again pointing out that a worst case scenario would see Choice at $198-202.

Over the course of last week, both the Choice and Select cutouts saw a net gain—Choice gaining $1.59 to settle at $225.21 and Select gaining $3.26 to settle at $215.47—but both gave back significant increases seen early in the week. That early week surge seen in product values was attributed to some brief procurement of loins and ribs that pushed the whole complex higher. It did not last. Vetterkind noted that the situation could hold some downside risk in the near future.

Live cattle futures slipped lower last week with the early week expectation of lower cash and the disappointment over domestic demand going forward. Over the course of the week, the June contract lost 65 cents to close Thursday at $137.40 and the August contract lost 37 cents to close at $137.83.

“I still view June live cattle as having some near-term support in this $136-137 range, but formidable resistance back up at $139-140. I would pretty much view August live cattle as having the same support and resistance levels for the near-term. $140 looks like tough overhead for front month live cattle on a weekly chart.”

While the future looks a bit bleak in terms of domestic demand, recently released information made past demand look all the brighter.

“March proved to be another good month for muscle protein demand in the U.S.,” noted Steve Meyer and Len Steiner of the CME Daily Livestock Report. “[Real per capita expenditures] (RPCE) for the four major muscle protein species rose to $44.13, up 4.2 percent from February and 4 percent from March 2013. The month’s gain puts year-to-date RPCE for the four species at $129.71, 1.3 percent higher than last year and 4.1 percent higher than the average for March from 2009 through 2013.”

The RPCE measure is one tool in identifying consumer demand. Meyer and Steiner reported beef’s RPCE was $21.25 in March, up 3.4 percent from last year, though it was even with 2013 for yearto-date demand.

“The big factor for beef, not surprisingly, was a 7 percent increase in real retail price,” they concluded.

Feeder cattle

“Feedlots continue to compete aggressively for available supplies of cattle being offered to the market and farmer/feeders are reportedly in the mix for cattle, as well, which keeps pushing the market higher,” noted Vetterkind.

A greater understatement has not likely been seen in the cattle markets for a while. At current prices for benchmark medium and large 1-class (#1) steers in the 700-pound range, one has to wonder if market participants can breathe at such lofty heights. Week-to-week gains well into double digits were common last week, and the availability of heavyweight feeders seemed to have increased significantly.

California: At the Turlock Livestock Auction Yards, receipts were collected on 1,722 head with expectations of large volumes at their special feeder sale this week.

But last week’s sale saw steady prices on feeder cattle, with 7-weight, #1 steers bringing between $160-192. Holstein steers of the same weight range brought $100- 125.

Iowa: Roughly half the volume of receipts was brought in at the Bloomfield Feeder Cattle Auction compared to the prior week’s sale. Despite that, feeder steers under 700 lbs. were called up a whopping $12-19 with heavier steers mostly steady. Heifers under 550 lbs. were up $10-15 with heavier heifers up $2-4. Demand was called very good.

Few sales of benchmark steers were posted, but those two dozen that did sold between $188-196.

Kansas: The Winter Livestock Feeder Cattle Auction collected 2,878 receipts last week, with heavyweight steers selling up $4-6 and heifers of the same class steady to up $2. Lighter weight feeders were lightly tested but an “extremely higher undertone” was noted. A relatively large volume of #1 steers over 800 lbs. were sold, but those 7-weights that sold brought in $179-187.50.

Missouri: At the West Plains-Ozarks Regional Stockyards, almost 3,000 receipts were collected. Feeder steers and heifers sold up $3-5 with true yearlings bringing as much as $10-15 higher. Large packages of high quality, reputation feeders drew sharp increases in demand. Prices for #1, 7-weight steers ranged from $194-203.

Montana: The Public Auction Yards collected nearly 4,000 receipts, but due to no previous week sale, offered no trends. A higher undertone was noted on all classes of cattle offered in this special “PAYS Going to Grass” sale, and demand for feeders, replacements, and grass-worthy stockers was strong. The 64 head of averaging 780-pound yearling steers brought an average of $189.73.

New Mexico: The Clovis Livestock Auction sold feeder and stocker steers for $3-5 more than the prior week, and even saw some instances of $14-15 higher on select weight classes, which had particularly high quality offerings. Heifers were called mixed and unevenly steady. The nearly 100 head of 7-weight, #1 steers sold ranged from $178.50-187.

Oklahoma: At the El Reno Livestock Market, good volumes of feeder steers sold up $6-8, with $8-10 higher money for steers over 900 lbs., of which there were quite a few. Heifers were up $4-6 while calves of both sexes were too lightly tested for a trend, but a higher undertone was noted. Benchmark steers sold between $186-214 with averages ranging between the high- $180s and the low-$200s.

Washington: Receipts were down at the Stockland Livestock Auction of Davenport, and sales were largely steady on feeders. Cows were down $1-2, but slaughter bulls were up $9-10. The two packages of 5 head of 7-weight, #1 steers sold brought $169 and $180, respectively.

Wyoming: The Riverton Livestock Auction held a special bred cow and pair sale last week, so feeder receipts were limited to nonexistent. The few benchmark steers that sold were calves and they brought $176.75-190.

Feeder futures are looking up right along with the cash markets. Over the course of the week, the three nearestterm contracts gained over $1. The May feeder contract settled Thursday at $186.15, the August contract settled at $192.43 and September ended Thursday trade at $193.55.

“Nothing has changed in feeder futures as the uptrend is fully intact as long as August holds above $190 with price counts still open to $198,” said Vetterkind.

But while prices are highflying for feeders, there are problems ahead, namely on the supply side. Speaking about the impending Cattle on Feed report, Meyer and Steiner speculated about summer placements.

“About the only respite we see for the feeder cattle situation is if heifers that had been held for cow replacements are put back in the slaughter mix—and it is still too early to tell whether that will happen. The incentives to grow the cow herd remain huge but the question of forage availability remains.”

Gottschalk had some information on that Mother Nature-related concern.

“On a positive note, the latest interpretation for an El Niño developing is being moved up to the June-July period. The likelihood of intense heat developing this summer is reduced if an El Niño develops.”

He reported earlier in the week that the Australian Bureau gave odds of an El Niño development at 70 percent.

“However, unless Mother Nature actually begins to cooperate, herd expansion may prove to be very limited. If rain is not received, cow slaughter during the secondhalf of this year could equal or exceed year-ago levels.” — Kerry Halladay, WLJ Editor

 
 


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