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Monday, May 26, 2014

Cutouts advance

Last minute Memorial Day demand finally appears

by Kerry Halladay, Associate Editor

—Last minute Memorial Day demand finally appears

Last week was the final week retail buyers could fill grocery store coolers with beef ahead of the Memorial Day holiday. That long-awaited beef procurement finally came in the 11th hour, bringing up several portions of the cattle and beef market complex.

Cash fed trade was a mostly done deal by Thursday afternoon with over 61,000 head confirmed sold for the week. In the South Plains, cattle sold down $1 at $143- 144, and in the Corn Belt live cattle sold a weak steady at $145- 147, though dressed sales were called steady to $4 at $230-234. This weakness was attributed to packers having some cattle around them to kill already, buying cattle for a short production week this week, and feeders having a drive to move cattle out.

Andrew Gottschalk of Hedgers Edge predicted early last week that cash prices may not trade below $136-139. Unless… “The greatest risk to the cattle complex is external to the cattle market and hinges on product demand.”

This emphasis on the power of the consumer’s demand for beef was the constant refrain last week. Every analyst consulted reiterated the movements of almost all the cattle/beef market gears for the next few weeks turn on consumer demand. And good weather goes a long way to greasing those gears.

“The weather forecast for the holiday weekend looks to be very conducive for grilling throughout much of the country and this will actually be the first true test of beef demand for the spring/early summer season,” said Troy Vetterkind, of Vetterkind Cattle Brokerage. “We’ll have to see what happens, but it’s going to take getting into next week to see how this plays out.”

Cutout values surged last week as the “last minute holiday buying” demand gear ratcheted up. Increased domestic retail demand for rib, chuck, and loin primals, as well as steady demand for ground and round coupled with healthy export demand and reduced production to propel the Choice cutout up $5.81 over the prior week’s close with $231.79 on Thursday afternoon. Select also gained nicely with a close of $221.16, a weekly gain of $4.45.

“Add these weeks under 600,000 to the holidayshortened week next week, throw in the best demand period of the year and the ‘premier beef weekend’ and you have the recipe for the advancing cutout values,” said Gottschalk, but he also had a warning. With the “dog-days of summer” incoming and the Choice resistance still at $232, he said the next big move in cutout values will likely be a downward one.

“That doesn’t mean it has to start today, or even this week—just be ready.”

The tone of warning was shared by Steve Meyer and Len Steiner of the CME Daily Livestock Report, though on the topic of fed cattle prices.

“Once Memorial Day business orders are filled, packers will likely be less anxious to chase cattle, which could put some pressure on fed values going into the summer,” they said. “What is a big wild card at this point is how beef demand holds up during the hot summer months. … After a long winter, consumers may be willing to pay a premium for beef in the spring. Getting them to pay big bucks in July and August will be a much bigger challenge.”

Meyer and Steiner also pointed out that live futures are already pricing a $7 discount for summer fed cattle and speculated that a good part of the expectations involving packer behavior has already been priced by the market. Over the course of last week, near-term live cattle futures were a weak steady after surging early in the week on the coattails of feeders, then giving back all of the gains. By Thursday afternoon, the June contract settled at $137.60, a 30 cent loss compared to the prior-Friday settlement, and August settled with $138.65, a 22 cent loss.

Vetterkind said Thursday he did not expect much out of live cattle futures for the rest of last week but that this week will be “pretty important for the cattle futures trade as traders are going to want to see how well beef moves over the weekend to determine what cash price action we could be dealing with for the next 3-4 weeks.”

Feeder cattle

“Tight supply and strong demand to fill empty pen space continues to be the driving force in the cash feeder cattle trade no matter the price,” proclaimed Vetterkind of the cash feeder market last week. And a truer statement would be hard to find. Of surveyed feeder auctions, receipt volumes were up and price ranges for benchmark medium and large 1-class (#1) 7-weight steers ventured passed the $210 mark in some places.

Iowa: According to the Iowa Weekly Feeder Cattle report, over 5,000 receipts were collected across Iowa. While those volumes were down compared to recent sales, the prices were not. Benchmark steers sold between $184-201.

Nebraska: The Huss Platte Valley Auction collected 2,330 receipts last week with steers under 750 lbs. selling steady to up $6 while those over sold up $3-10. Heifers sold up $10- 15 and up $2-5, respectively, along the same weight breakdowns. Benchmark steers sold between $186-214 with calves bringing the low end, while thin-fleshed yearlings brought the high end.

Oklahoma: People wanted feeders in Oklahoma and the markets provided. In the OKC West-El Reno Livestock Market, nearly half again as many receipts were collected last week at 9,030 compared to the prior week’s 6,869. Feeder steers over 750 lbs. were steady to up $2 with instances of up $10 on 6-weights. Heifers were mostly steady to down $2, but calves of both sexes were up $5-10. Though the majority of the #1 steer offering was over 800 lbs., the 7-weights sold between $185.75-205. All the while, things were similarly going nuts at the National Stockyards, where 12,574 receipts were collected last week compared to the prior week’s 9,402. Feeder steers under 850 lbs. were $3-6 higher, while heavier steers were steady to up $3. Heifers were steady to up $2, while calves were steady to up $4 for steers. Again, the majority of the #1 steer offering was over 800 lbs. but those 7-weights that sold ran from $183-205 with lower prices going for calves and yearlings on the heavier end.

Feeder futures were again the star of the futures world last week. The May contract left the board at $189.08, up $1.78 compared to the prior Friday’s close. August settled at $195.38, a $2.06 weekly gain, and September climbed $2.25 to settle at $196.55. Vetterkind noted that August takes the spot month position $10 over the index, which could invite a break or at least limit rallies in the near term.

The future of feeder supplies and the June and August futures is something of curiosity, however. Meyer and Steiner pointed out that the current inventory of cattle that have been on feed more than 120 days was down 8 percent compared to the previous year.

“This is important as it reflects the supply of cattle that may be available for marketing in the next 30- 40 days. Moreover, because feedlots have had to dig deep in the feeder supply in order to find cattle, a larger portion of the cattle placed on feed has been light feeders, which normally take longer to become market ready.”

Light cattle already placed won’t be available to enter feedlots later, nor will they be available as fed cattle for a while. So what does that mean for the potential supply of fed cattle later in the summer?

Herd expansion and crop watch

Another gear in the feeder supply chain that may or may not move is herd expansion and drought.

“The principal factor that could significantly pressure feeder markets going into summer would be a significant redevelopment of drought conditions back into areas of currently improved pasture conditions,” advised Derrell S. Peel, Oklahoma State University Extension Livestock Marketing Specialist.

“Drought redevelopment could lead to early marketing of calves and stockers, along with diversion of replacement heifers back into feeder markets.”

He noted that 22 percent of pasture and ranges are rated poor to very poor compared to 33 percent last year, and hay stocks as of

May 1 were up 35 percent compared to the prior year. This is optimistic for attempted herd expansion, but this again hinges on the potential of renewed/continued drought.

On the plus side, however, corn planting progress is back on track with the five-year average and USDA reports suggest a record crop for 2014/15. Both of these things are supportive of feeders. Over the course of last week, the July corn contract fell almost 7 cents to $4.76’6/bu.

“Corn is bouncing today, responding to an extremely ‘oversold’ condition and to support from the higher bean market,” reported Gottschalk on Thursday. “It remains our belief that corn rallies will be limited in scope and in breadth, so long as Mother Nature remains passive.”—Kerry Halladay, WLJ Editor

 
 


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