August 7, 2008
Good Morning from the Chicago Board of Trade,
Cash Cattle Situation and Outlook:
The cash fed cattle market was quiet yesterday with the only cash transactions taking place were of those cattle selling through auction. We did see a few packer bids begin to surface yesterday at $96 live in the south with feedlots firmly priced at $100-$101 live and $1.60 dressed. We might see a light trade develop in the north as early as today; however I would imagine that most of the trade will wait until tomorrow. When it does take place it should certainly be fully steady to $1-$2 higher given sharply higher settlements on front month live cattle futures and a higher beef market. Smaller feedlot showlists and I think what can be described as good packer demand for cattle will all be supportive to this week’s trade. I believe packers are not only getting decent domestic and export orders for beef this week, but they also have a pretty hefty pre-sold position of beef that they are going to need cattle to kill for. For these reasons I will call for a $99-$100 live and $1.56-$1.58 dressed trade by tomorrow afternoon.
Cattle selling through the northern auction markets were bringing fully $2-$3 higher on the fed cattle as is evident by market reports from Sioux Falls and Yankton, SD. The fed beef steers and heifers in both those barns yesterday were bringing $97-$98 on the choice cattle, with the choice Holstein steers bringing $82-$85. Slaughter cows were trading on a higher market with the cutter and boning utility cows bringing $51-$68 and the breaking utility and cows that will grade white bringing $65-$73. Feeder cattle markets are mixed, however a higher trend is still firmly in place on the yearling cattle. El Reno, OK held their weekly sale yesterday with an estimated run of 4,400 head on offer and a market they were calling $1 lower on cattle over 800 lbs and $1 higher on cattle under 800 lbs. The bulk of the 650 lbs-850 lbs medium/large frame #1-#2 feeder steers in El Reno yesterday were bringing $109-$117. The cash cattle markets continue to feel good to me and I think we can see all classes of cattle selling at higher money going into next week.
Cash Beef Situation and Outlook:
Yesterdays kill was estimated at 126,000 head, which would be 1,000 head below last week and 3,000 head above the same day a year ago. The week-to-date kill now stands at 379,000 head, which would be even with the same period a week ago with the industry looking for a 665,000 head production week. The boxed beef market was higher yesterday with the choice cutout closing $.75 higher to settle at $160.88 and the select cutout closing $.61 higher to settle at $154.78. Sales volume was good with 366 loads of beef sold (116.17 loads of choice fab cuts, 135.48 loads of select fab cuts, 25.34 loads of trim, 88.63 loads of grinds). The choice/select spread settled at $6.10 a gain of $.14.
The beef market was higher yesterday on renewed buying of end meats. There was also mostly higher pricing throughout the rib and loin complex as well yesterday adding to the higher cutout settlements. Packers cite manageable inventory levels of beef to sell and talk about getting decent export orders along with forward pricing of middles. All of this should continue into next week keeping support under the market. Boneless beef items and imported beef prices were slightly softer yesterday, however ground beef demand remains very robust and traders cite the pull back yesterday as nothing more than a correction in the current uptrend. I will continue to look for a sideways to higher beef market going into the first part of next week. Beef exports for the week of July 25-31, 2008 are as follows:
Beef: Net sales of 9,700 MT were primarily for South Korea (3,000 MT), Canada (2,100 MT), Japan (1,600 MT), Mexico (1,600 MT), Russia (400 MT), Taiwan (300 MT), and Vietnam (200 MT). Exports of 13,700 MT were mainly to Mexico (5,500 MT), South Korea (2,300 MT), Canada (1,900 MT), Japan (1,500 MT), Vietnam (900 MT), Russia (600 MT), and Taiwan (500 MT).
Futures Market Situation and Outlook:
August live cattle settled at $102.35 a gain of $2.12, October live cattle settled at $108.55 a gain of $1.65, and the December live cattle settled at $107.25 a loss of $.05. In the feeder cattle pit, August feeder cattle settled at $115.50 a gain of $.15, September feeder cattle settled at $117.20 a gain of $.10, and the October feeder cattle settled at $117.52 a loss of $.02. The reported CME feeder cattle index for 8/5/08 was $111.18 a gain of $.04.
Yesterdays live cattle volume saw 50,996 contracts trade in the pit and 23,959 contracts trade on Globex. Live cattle open interest declined 6,842 contracts to come in this morning at 290,147. Yesterday’s feeder cattle volume saw 6,429 contracts trade in the pit and 1,414 trade on Globex. Feeder cattle open interest gained 938 contracts to come in this morning at 35,735.
Live cattle deliveries continued last night with 30 new loads posted against the August live contract (15-Dodge City, KS, 5-Texhoma, OK, 10-Tulia, TX) and 12 retenders from Wednesday (2-Pratt, KS, 10-Tulia, TX). Of the 12 retenders, all 12 were demanded for by Rosenthal. Delivering cattle yesterday were MF Global-11 loads, Man Clearing-1 load, RJO-28 loads, and Rosenthal-2 loads. Receiving yesterday’s deliveries were Rosenthal-12 loads (demanded) and Penson-30 loads, with a last date of 6/13/08 and a settlement price of $102.35. Month-to-date totals show 50 tenders, 20 retenders, and 20 demands @$1 discount.
It was another wild day in the commodity markets yesterday with commodity fund restructuring and selling the main catalysts for the extreme moves in grain and meat futures. There were a lot of rumors floating around Chicago yesterday about the CFTC reclassifying certain hedge funds from commercials to large speculators, thus decreasing their position limits and increasing their margin requirements, and some of this was being touted as a reasons for the massive liquidation in corn and soybean futures since the first of the week. I don’t know if the rumors are true or not, however what is quite clear is that there are massive amounts of money being moved around in these markets right now, and this is type of price action is the main reason we are seeing such distortions in meat futures. How do you know front month cattle and hog spreads are going to move $3-$5 in two days? You don’t! Which is why it is important to realize what is going on and keep in mind what the fundamentals of the market are. Obviously we have built huge premiums in deferred month live cattle and lean hog futures on the back of $7-$8 bu corn, and with the recent $3 bu break in corn futures, we are seeing liquidation of long fund positions in those deferred month meat contracts. Is that the right thing to do in back month cattle futures? Probably, as we are going to be placing a lot of big yearling cattle coming off of grass into the first quarter of 2009, and we will have increased fed cattle supplies past the first of the year, just like last year. What I don’t know is, if it is the right thing to do in the hog futures, as we have liquidated a lot of our sow herd during the first half of this year, Canadian hog numbers are down, pork imports are down 14% ytd, and pork exports are up 61% ytd. The same type of scenario holds true in the cattle market, as we see ytd cow slaughter up 6%, ytd beef imports down 22%, and ytd beef exports up 33%. Factor in ytd broiler exports up 29%, and one needs to be careful about getting too bearish meat markets going into 2009, as we clearly have an overall trend of decreasing beef, pork, and poultry production with increasing demand overseas for each of these markets going forward.
So with all of that said, what in my opinion is the right way to be looking at the cattle market going forward? We know our on feed numbers are below a year ago, and this will be the case for the next several weeks, which is going to be supportive to cash fed cattle and beef prices. This next leg up in cash cattle and beef prices going into the fourth quarter, will eventually pull back month fat cattle futures back up in my opinion, a rally we will want to use as a hedging opportunity in Feb and April futures. We have likely seen the highs in these contracts for the year, however I do think we will get a better hedging opportunity this fall. Feeder cattle numbers coming to market are going to start increasing later this month and we are going to see a big run of grass cattle coming off pasture followed by the yearly calf run out west through Sep, Oct, and Nov, which in my opinion means we need to be selling rallies in Oct and Nov feeder futures back near all time contract highs of $119-$120. Front month August and Oct fats are probably going to be a sell at some point as we will likely get these contracts a little too far ahead of cash, however we need to get this spread trade worked out first. I still think if we run into a marketing hole later this year, it is going to come in late October through Nov, and I continue to like December live cattle futures for this reason. Look for a $.10-$.20 higher open to live and feeder cattle futures this morning. Trade Well!!!
Any one wanting a more detailed report on the cattle and beef markets including fundamental, chart and technical analysis, plus spec/hedge recommendations for packers, processors, producers, and meat buyers feel free to contact me by phone or e-mail to set up a free trial.
There is risk in trading futures and options.
Have a Good Day,
Troy Vetterkind
Chicago Board of Trade
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