— Exchange contracts ignore lower cash to rally sharply.
Fed cattle trade last week began in the northern tier and western Corn belt on Wednesday at prices sharply lower than the previous week. Cattle trade in Nebraska and Colorado moved good volume, with more than 100,000 head trading hands at $3 lower than the prior week at $125 dressed and $78-78.75 live, $2-3 lower than the prior week. In the southern Plains, bids and offers were still far apart and as of Thursday, cattle in the south had not traded. Analysts last week expected southern cattle trade would occur $2 lower, in the range of $78-79, when cattle did finally change hands.
There has been some talk about an upswing in the fed cattle market which has led some to believe the market has already put in its summer low, but Darrell Peel at Oklahoma State University said the market hasn’t come close to bottoming out.
“We thought we already set the summer lows, but we haven’t seen the summer low yet. We are going to be trading cattle somewhere in the $70s until Labor Day,” Peel said.
The drop in fed cattle trade last week came as packers tried to protect their positive margins in the face of slipping demand at the consumer level and lower boxed beef prices. On Thursday, HedgersEdge.com estimated packer margins in the black at $54.32. That margin was down from the prior week as packers found it more difficult to move boxed beef last week at asking prices. At the wholesale level, buyers have already replenished the supply of beef depleted by better than expected Memorial Day sales and the forward purchasing for Father’s Day and Fourth of July holidays is said to be mostly complete. That buying has left packers in a situation of having to discount boxed beef in order to move product out of their coolers.
Last Wednesday, they were able to do just that. USDA reported very good movement of product, with 676 loads of boxed beef selling at prices 53 cents lower on Choice product and 42 cents lower on Select cuts. Prices on Thursday were again lower by 30 cents on Choice product and only slightly lower on Select. Prices were expected to trend lower for the next several days as everyone in the game attempts to stay current and avoid stockpiles. Those stockpiles will be difficult to avoid without heavy discounting or help from the export markets opening at some point in the process this summer. Feedlots have done an exceptional job of staying current in light of heavy front-end supplies of finished cattle and packers have been harvesting good volume to keep pace.
Slaughter volume on Thursday last week was estimated at 126,000 head and USDA estimated the total harvest for the week to date at 501,000 head. Expectations were for a total weekly harvest in excess of 700,000 head again last week. That number is 4,000 head below the previous week estimate and almost 15,000 head higher than 2005. Those numbers appear to indicate good news for the upcoming cattle on feed report. Pre-report estimates for both number of cattle placed on feed and marketings are expected to lend support to the market later this year. According to estimates from the Livestock Marketing Information Center (LMIC), taking into account one additional marketing day in 2006, the number of cattle marketed last month is estimated more than 8 percent above 2005. Steep slides in the number of cattle placed in May are expected to push the placements number to 4.6 percent below last year’s levels. Those numbers, if they prove out, could lend support to the later part of this year for cattle feeders.
Jim Robb, director of LMIC, also pointed out May placements of imported Canadian cattle were well below the levels of recent months, but still contributed to the number of cattle placed in May.
Peel agreed, and said the headlines about 9 percent more cattle on feed were just indicative of more cattle stacked up early in the year.
“There were more cattle put in feedlots early, which caused cattle to stack up. The payoff is going to come in the third and fourth quarters of this year as a result,” Peel said. “I expect this month’s cattle on feed report to show placements down substantially, as much as 5-7 percent lower.”
With regard to marketings and the impact on current pricing levels, particularly the Choice/Select spread which continues to trend above $22, Robb said there was no evidence cattle feeders had been pulling cattle forward in an effort to clear pen space or get ahead of the curve to take advantage of favorable pricing, although it may be in their best interest to do so.
“Current slaughter weights don’t show there is any evidence of feeders pulling cattle forward. In fact, last week, average slaughter weights were actually up two pounds above the week prior. Instead, it just looks like the industry is having a difficult time getting cattle to grade Choice,” Robb said.
On the Chicago Mercantile Exchange (CME) last week, live cattle contracts rebounded sharply from their oversold condition on Thursday. Analysts reported the action was largely due to a narrowing of the basis as the contracts begin to trade closer to par with cash trade. The June contract gained 272 points Thursday, closing at $80.95. In fact, contracts across the board rebounded despite the lower cash trade being reported. The August contract gained another 300 points on Thursday to close the day at $82.60. October live cattle gained 265 points to close at $85.95 and December contracts moved 205 points higher to end the day at $87.10.
Feeder cattle were also on the up trend in auction markets across the country, as well as on the CME. The reasoning behind such sudden jumps is up in the air, with several theories floating around the marketing arena. Darrell Mark, University of Nebraska agricultural economist, said he has been out of the office and is unsure as to the sudden spikes, but said optimism about overseas markets may have caused some of the action.
“I think it is probably related to optimism in the export markets,” said Mark. “Many are being hopeful and that can cause a rally.”
Others, however, say export markets are unlikely to be the source of motivation in the markets, due to Japan and South Korea still dragging their feet regarding trade resumption.
On the CME Thursday, midday trading was jumping as high as $178 for August contracts and $142 for September trades. By the end of trading Thursday, August contracts settled 293 points higher at $112.35. September trades jumped even higher to settle at $111.83, a 300 point jump. October contracts climbed 265 points to close at $110.48.
“Last week, the markets were oversold and traders are just having fun trading back and forth, like playing monopoly.” Peel said such trading in commodities results in a big impact compared to other financial trades.
“A lot of money chasing a few places to park it resulted in heavy commodity trading,” said Peel. “It may not be much money to them, but relative to the size of our market, it gets impacted in a big way.”
As far as the auction markets are concerned, feeders are holding steady to $2 higher in most geographical regions. In fact, at the 1st Annual Famoso All Natural Stocker and Feeder Premium Sale, which was held last Thursday, more than 16,000 head sold very well, according to Jerry York, WLJ field representative. York said calves sold steady to slightly stronger with fleshing conditions ranging from thin to moderate. He said 525 weaned steer calves weighing 640 lbs. sold for $129.75. Also, 173 calves weighing 502 lbs. sold for $135.
Yearling cattle sold $2 higher in good condition. York said 502 yearlings weighing 779 lbs. sold for $111 with active Internet participation. He said certified natural cattle were realizing an $8- 10 premium. Most feeder cattle, according to York, received active buyer participation from Midwest and eastern buyers.
Along those lines, Oklahoma City, OK, feeders sold steady last week. Demand was described as moderate for all classes as buyers discriminated a little more for quality last week. Receipts totaled 10,200 head, down from the week’s prior 14,534 head. Peel said he has had several conversations in the past week with cattlemen wondering why the feeder market is holding strong. He said the short answer is there really aren’t that many cattle to work with. More specifically, “cattle that should have sold in the second quarter sold in the first quarter.” He said cattle that should have sold in May, were already gone by March.
Likewise in La Junta, CO, last week, feeder steers and heifers under 700 lbs. sold mostly steady in a light test. Yearling feeder steers sold $2 higher on improved quality. In Hub City, SD, last week, compared to a week prior, feeder steers sold steady to firm.
Feeder auctions across the country are displaying a solid, firm feeder market. Peel said, however, the severe drought leaves the future up to discussion. He said as far as stockers, he sees them presenting little impact to the market due to few head still being out there. Peel said most were already sold due to diminishing wheat and grass. He said where the impact could occur is in the cow/calf arena.
“If a lot of culling, liquidation and early weaning occurs, we could see some impact,” Peel said.
He said the Plains states will determine largely what the feeder market will do since “65 percent of the beef herds” are located in those regions. He said many may send cattle to the feedlot early instead of waiting until July. At this time, the future of feeders rests in the hands of mother nature. — WLJ