Much of the feeder cattle industry was focused on another large Superior Video Auction this week that offered 238,000 head.  There again, demand appeared to be much better for late summer and early fall deliveries of heavy yearling cattle than it was for the fall calf consignments.  In fact, there is very little price per cwt difference between 900 lb yearlings steers and 600 lb steer calves.  Corn prices are steadily weakening but cattle feeders are leery of the fed cattle market that was supposed to have been well over 100.00 by now, instead of fledgling in the mid 90’s.  Beef cut-out values have fallen sharply since their rapid rise early in the summer, but some analysts believe retailer inventories are low and Labor Day purchasing will be brisk.  Pork cut-out values hit an all-time high on Friday at 88.90 with support from healthy exports, while live hog prices remain volatile and many of the few independent producers that were left have recently thrown-in the towel.  Kansas and Nebraska feedlots sold cattle 2.00-3.00 higher from 97.00-97.50 on Friday afternoon, while Texas feedyard managers were still refusing the 97.00 bids after the August Board closed at 100.00.  This week’s reported auction volume included 46 percent over 600 lbs and 41 percent heifers.

The global economy, excluding the United States, is now experiencing weakness, sluggishness and stagnation in the growth of non-U.S. economies.  The U.S. economy hit bottom or is already in the process of finding its bottom; and the foreign economies of the world are just now staring into an economic abyss, if you will.  Yes, there are still many problems being felt within the U.S. economy that are working together (i.e. credit crisis, housing, real estate values, capital deterioration in business balance sheets, etc.) to keep our stock markets at bay.  But, the resilience in the strength of the U.S. Dollar is helping to keep our economy from slipping into a recession.  In my opinion, the United States will not slip into a recession due to the strength of the U.S. Dollar.  But, I don’t believe the U.S. Dollar is strengthening due to things getting that much better here in the U.S.  Rather I think the dollar is strengthening due things getting that much worse outside of the U.S., economically speaking.

I believe there to be a large amount of money that is preparing to move, or already is moving, out of commodities and foreign stock markets; and into U.S. stock markets.  As this plays out and as long as the dollar continues to strengthen, this will encourage more foreign investment in U.S. stock markets and help to solve some of the capital deterioration problems being experienced with business balance sheets today.  This should help to improve stability for U.S. businesses and help to ignite expansions, acquisitions and job creation; eventually improving the financial outlook for that part of the U.S. economy that accounts for almost 70% of activity, the consumer.  But any U.S. economic recovery will be painfully slow due to the foreign economies of the world going through their economic slowdowns. 

These economic events could result in a significant change in worldwide demand for commodities; notice I said change, not decrease or deterioration.  When the U.S. Dollar was at record lows, world demand for commodities was very strong.  However, I believe that this demand was what they call “front-loading” (buying as much as possible before it disappears or becomes more expensive).  If things progress as stated above, I think worldwide commodity demand will remain nearly the same as it is now (although it might weaken a little at first, due to the “front-loading”, but then strengthen up again); moving more to a steady consistent level of demand.  After all, the “lesser developed” countries of the world are not going to go away, nor will they give up their long awaited improvements very easily.  I believe we will see some economic growing pains in these “lesser developed” countries, but it won’t ruin them and they’ll be just as hungry for world commodities then, as they are now; albeit over a more steady and consistent time span. 

Two weeks ago, nearby corn futures were extremely oversold pointing to some kind of technical rally (technical, not fundamental).  Since then, the corn market reached a short-term bottom and rallied 55 cents from that bottom up to around $6.00 and has now pulled back to around $5.65.  Today, the corn market is neither oversold, nor overbought; and the important point being that the oversold condition of this market has been corrected.  Now, the corn market can go either way; further up to become overbought or turn around and move lower.  If it moves higher, then it would most likely aim for the $6.50 level in nearby futures, as $6.50 is about a dime below the 50-day moving average; a supporting factor for this kind of rally may be due to some continued basis improvement in corn, as basis did improve this past week anywhere from 2 to 6 cents from the Gulf throughout the interior.  If corn futures move lower, then the first support would be the short-term low around $5.40 and if it takes that low out, then a significant move down could occur with a technical projection of $3.80.  Most likely, the $4.00 level will be the focus rather than the $3.80 level.  Is this possible, in my opinion yes, but more likely around harvest time and not so much now due to the more than $2.00 drop already experienced in corn futures.  I do believe that eventually (i.e. by harvest) nearby corn futures will be closer to $4.50 (if not below) then $6.00.  At any time, this corn market could embark on some kind of additional rally; but as I have said before, I think any rallies in corn should be sold; even if there is some potential damage to this year’s corn crop.  Generally speaking, bullish demand for corn has been severely rationed by these high prices, both relative to end users as well as fund investors. 

The cattle market seems to be finding its legs again.  Fat cattle basis is improving a little bit as this past week’s cash improved anywhere from $2 to $4 with futures improving $2.20.  Boxed beef prices didn’t change much this past week as choice finished at $158.32 (down 18 cents) and select finished at $151.29 (down $1.28); basically the packer has given back a little bit of the profit margins they picked up the past two weeks.  Year-to-date slaughter is running about 1% ahead of last year’s pace; but live weights are now even with a year ago and dressed weights are now 4 pounds lighter than a year ago.  Both live and dressed weights currently are down from this spring’s highs that were about 25 pounds heavier than a year ago.  This year’s beef production is now running just 1.76% ahead of last year’s pace; which is down from a high of 2.66% towards the end of May 2008.  I am not looking for a lot of strength in the live cattle futures contracts, unless cash prices begin to outpace August live cattle futures.  So, putting on a hedge around mid August for cattle coming out of the feedyard during September could yield some nice basis gains. 

October live cattle futures (i.e. $107.80) are already at contract highs over $104.  I believe that cash fat cattle prices may approach the current nearby futures high of $104 as we come closer to Labor Day.  Then October live cattle futures will begin to come down to the cash level, at that time, once we move beyond Labor Day.  I’ll bet we end up seeing cash fat cattle prices around $100 per cwt in late September thru early October.  In my opinion, cash fat cattle prices could trade around this $100 (plus or minus a couple bucks) through mid October (October is Pork Month) and into the early part of November (Thanksgiving) due to spotty beef demand and the fall weaned calf crop becoming available.  But, after Thanksgiving, cattle prices could really take off as December 2008 and all of 2009 live cattle futures are currently above $110 by anywhere from 12 cents to almost $4.00.  Market ready cattle supplies in the feedyard should continually get tighter as we move towards Christmas.  Tightness of market ready cattle beyond Christmas will depend upon the price of corn and wheat.  I don’t know what the highest cash price, fat cattle have ever traded in the feedyard, but I believe the cash fat cattle market towards the end of 2008 or early 2009 will test and take out these highs, if not before.

--- Mike S. Traffas

Chart for week ending August 1st:

• Friday's Factor: +0.34
• 10 Day Average: -1.21

The rule covers muscle cuts and ground beef (including veal), lamb, chicken, goat, and pork; perishable agricultural commodities (fresh and frozen fruits and vegetables); macadamia nuts; pecans; ginseng; and peanuts -- as required by the 2002 and 2008 Farm Bills. USDA implemented the COOL program for fish and shellfish covered commodities in October 2004. Commodities covered under COOL must be labeled at retail to indicate their country of origin. However, they are excluded from mandatory COOL if they are an ingredient in a processed food item. 

USDA has also revised the definition of a processed food item so that items derived from a covered commodity that has undergone a physical or chemical change (e.g., cooking, curing, smoking) or that has been combined with other covered commodities or other substantive food components (e.g., chocolate, breading, tomato sauce) are excluded from COOL labeling. Food service establishments, such as restaurants, lunchrooms, cafeterias, food stands, bars, lounges, and similar enterprises are exempt from the mandatory country of origin labeling requirements. 

The rule outlines the requirements for labeling covered commodities. It reduces the recordkeeping retention requirements for suppliers and centrally-located retail records to one year and removes the requirement to maintain records at the retail store. The law provides for penalties for both suppliers and retailers found in violation of the law of up to $1,000 per violation. 

The rule will become effective on Sept. 30, 2008. To allow time for covered commodities that are already in the chain of commerce -- and for which no origin information is known or been provided -- to clear the system, the requirements of this rule will not apply to covered commodities produced or packaged before Sept. 30, 2008. The rule prescribes specific criteria that must be met for a covered commodity to bear a "United States country of origin" declaration. In addition, the rule also contains provisions for labeling covered commodities of foreign origin, meat products from multiple origins, ground meat products, as well as commingled covered commodities. 

• Oklahoma City, OK- Bred Cows:  Medium and Large 1-2  5-6 yrs 1000-1275 lbs 6-7 months 860.00-945.00; 7-9 yrs 950-1200 lbs 5-7 months 600.00-710.00; 10+ yrs 1050-1100 lbs 2-6 months 550.00-610.00.

• Woodward, OK- Bred Cows:  Medium and Large 1-2  4-6 yrs 1025-1300 lbs 3-5 months 835.00-1035.00.00; 5 yrs 1300 lbs 7 months 1035.00; 5-7 yrs 1150 lbs 2-3 months 690.00-750.00.

• Joplin, MO- Bred Cows:  Medium and Large 1-2  2-6 yrs 2nd-3rd stage 1075-1345 lbs 725.00-935.00, few young blk 3rd stage 970.00-1000.00, 1st stage 970-1175 lbs 675.00-790.00.  Medium 1-2  4 yrs 1st, 2nd and 3rd stage 950-1025 lbs 675.00-700.00.

• Buffalo, TX- Bred Cows:  Medium and Large 1-2 young to middle aged 700-1200 lbs 1-8 months 580.00-990.00.

• Tulia, TX- Bred Cows:  Medium and Large 1-2 young to middle aged 1240 lbs 4-6 months 775.00; aged 800-950 lbs 4-8 months 450.00-550.00.  

• Philip, SD- Bred Cows:  Medium and Large 1-2 Young to Middle Aged 1265-1345 lbs 4-7 months 1040.00-1060.00, pkg 970.00.

• Southeast- Bred Cows:  Medium and Large 1-2  3-7 yrs 850-1250 lbs 2nd-3rd stage 650.00-900.00; 8-10 yrs 850-1200 lbs 2nd-3rd stage 550.00-750.00.

• Oklahoma City, OK- Bred Cows:  Medium and Large 1-2  4-7 yrs 1025-1350 lbs 5-7 months 810.00-950.00; 5-8 yrs 1150-1350 6-7 months 685.00-795.00; 10+ yrs 1000-1150 lbs 4-6 months 500.00-525.00. 

• Woodward, OK- Bred Cows:  Medium and Large 1-2  1-5 yrs 850-1200 lbs 2-7 months 850.00-920.00; 3-6 yrs 1150-1325 lbs 3-4 months 750.00-850.00; 5-6 yrs 1175 lbs 6-7 months  hi blacks 1110.00; 7-10 yrs 1125-1200 lbs 5-7 months 790.00-810.00.

• Joplin, MO- Bred Cows:  Medium and Large 1-2  4-7 yrs 2nd-3rd stage 1090-1350 lbs 735.00-900.00.  Large 1-2  5-6 yrs 3rd stage 1400-1600 lbs 850.00-975.00. Medium 1-2  2-5 yrs 2nd stage 950-1000 lbs 600.00-685.00.

• Abilene, TX- Bred Cows:  Medium and Large 1-2 young to middle aged 845-1090 lbs 2-7 months 465.00-930.00; young to middle aged 1115-1485 lbs 3-7 months 760.00-950.00.

• Lampasas, TX- Bred Cows:  Medium and Large 1-2 young to middle aged 900-1200 lbs 6-8 months 635.00-825.00; aged 900-1200 lbs 4-5 months 555.00-590.00.

• Dodge City, KS- Bred Cows:  Medium and Large 1-2 solid mouth 1200-1350 lbs 2nd stage 860.00, 1st stage 1150-1250 lbs 780.00, short solid to broken mouth bred 1100-1350 lbs 850.00. 

• Southeast- Bred Cows:  Medium and Large 1-2  3-7 yrs 850-1250 lbs 2nd-3rd stage 625.00-9000.00; 8-10 yrs 850-1200 lbs 2nd-3rd stage 525.00-650.00.

• Oklahoma City, OK- Pairs:  Medium and Large 1-2  2-3 yrs 950 lbs w/250-275 lb calves 1150.00; 4-5 yrs 1250-1300 lbs w/175-250 900.00-1025.00.

• Woodward, OK- Pairs:  Medium and Large 1-2  2-7 yrs 950-1150 lbs w/225-250 lb calves 1050.00-1160.00. 

• Joplin, MO- Pairs:  Medium and Large 1-2  2-6 yrs 1035-1345 lbs w/135-400 lb calves 925.00-1125.00, young w/160-300 lb calves 1200.00-1275.00.  Large 1-2  5-7 yrs 1360-1500 lbs w/165-250 lb calves 985.00-1180.00.  

• Buffalo, TX- Pairs:  Medium and Large 1 young to middle aged 900-1000 lbs w/200-300 lb calves 910.00-1110.00.  

• Tulia, TX- Pairs:  Medium and Large 1-2 young to middle aged 1000-1450 lbs w/75-250 lb calves 700.00-1000.00.  

• Philip, SD- Pairs:  Medium and Large 1-2 Young to Middle Aged 1240-1300 lbs w/165-205 lb calves 1100.00-1200.00, pkg 1360 lbs cows w/250 lb calves 1270.00.  Middle Aged to Aged 1100-1300 lbs w/ 70-150 lb calves 950.00-1030.

• Southeast- Pairs:  Medium and Large 1-2  3-7 yrs 800-1200 lbs w/100-200 lb calves 925.00-1025.00, w/200-300 lb calves 1000.00-1150.00, few to 1300.00.  Small and Medium 1-2  5-10 yrs 750-950 lbs w/100-200 lbs 650.00-775.00.

• Woodward, OK-  Pairs:  Medium and Large 1-2  3-5 yrs 1150-1200 lbs w/200-300 lb calves 1185.00-1200.00; 3-6 yrs 1000-1025 lbs w/100-300 lb calves 910.00-1050.00; 8-10 yrs 1150 lbs w/150-200 lb calves 925.00

• Joplin, MO- Pairs: Medium and Large 1-2  2 yrs to short and solid mouth 900-1275 lbs w/baby to 400 lb calves 900.00-1125.00, few 1150.00-1275.00.  Large 1-2  5 yrs 1400 lbs w/175 lb calves 1100.00.  Medium and Large 2  3 yrs to short and solid mouth 875-1200 lbs w/150-300 lb calves 685.00-900.00.  Medium 1-2  3-4 yrs 940-1050 lbs w/baby to 425 lb calves 850.00-1000.00; broken mouth to aged 950-1000 lb w/baby to 150 lb calves 600.00-650.00.

• Abilene, TX- Pairs:  Medium and Large 1-2 young to middle aged 1190-1705 lbs w/150-300 calves 900.00-1300.00. 

• Lampasas, TX- Pairs:  Medium and Large 1-2 young to middle aged 900-1200 lbs w/100-250 lb calves 760.00-1280.00; aged 900-1100 lbs w/100-250 lb calves 660.00-960.00. 

• Dodge City, KS- Pairs:  Medium and Large 1-2 short solid to broken mouth 100-1250 lbs w/225-275 lb calves 1060.00.

Southeast- Pairs:  Medium and Large 1-2  3-7 yrs 800-1200 lbs w/100-200 lb calves 825.00-1000.00, w/200-300 lb calves 950.00-1100.00, few to 1250.00.  Small and Medium 1-2  5-10 yrs 750-950 lbs w/100-200 lb calves 650.00-775.00. 

• Typical closeout for steers sold this week: ($82.94)
• Projected closeout for steers placed on feed this week: ($12.67)

The average live weight of cattle slaughtered in the Texas Panhandle for the week ending 07-26-2008 was 1256 lbs with 40 percent heifers compared to 1253 lbs and 45 percent heifers the previous week and 1265 lbs and 37 percent heifers the same week a year ago.

Packers are carefully managing the slaughter levels to assure too much product does not overwhelm the market. Slaughter rates for the past few weeks have moderated to 660,000 head.  Demand should improve into Labor day as temperatures cool and demand increases. The demand side will also be helped by the balance of beef moving in and out of this country. Exports are expanding while imports are decline. The value of the dollar is a big driver. The wild card on the demand side is and will remain the ability of beef to price into the household budget as beef prices work higher this fall.

A pared back weekly slaughter finally reversed the steep decline in box prices and box activity seems to be leveling out. Retailers also will sense they are nearing an interim low for box prices.  Choice cuts fell back to $158, and select held at $151. The choice select spread narrowed to $7.

Feeder futures shot higher after cash prices for fed cattle rallied and corn prices dropped. Feeder prices in the cash market also moved back to a couple dollars under the August futures board. The continuing relationship between weigh classes will depend on the direction of corn prices. Winter grazing is expected to be limited and demand for light calves meager at best. 

Placements into the feedyards moderated after several weeks of increases. The build up of inventory outside feedlots is now beginning to surface and offerings are increasing. In spite of the run up in feeder prices currently, prices are expected to move lower as additional country cattle come to market this fall. 

There appears to be little evidence of dwindling supplies in the current data. Slaughter weights remain above last year. The choice/select spread, that had been widening, is now narrowing reflecting plenty of choice cattle on the market. The large premiums in the deferred futures contracts for live cattle has kept feeders holding cattle betting on better prices to come. 

The past week's price of $95 reestablished large losses for feeders and continued the stress in the industry. Favorable government action to stem high corn cost seems to be stalled. The request by Texas Governor Perry to reduce the mandate for more corn based ethanol in the gasoline blend, has been passed off to EPA for comment. USDA decision on en early release non-penalty of CRP acres has been challenged by environmental groups and will require more vetting and the decision delayed. The elimination of a tariff on Brazilian ethanol imports has mixed support in Congress.

Meanwhile, cattle feeders are suffering large losses with the prospects of a rally dimming. Slaughter rates have slowed in an effort by beef processors to hold on to generous margins.  This has prevented feeders from working through the larger front end supplies and delayed the hope for a rally. Forecasters were considering the end of this month as the summer lows, but there may be more decline to come. The emergence of the export markets, as a major factor in improving demand and pushing up prices, will be important to the rally if and when it comes. Domestic demand is soft as more and more consumers struggle with balancing the monthly budget. 

Corn prices moved 20 cents lower at week's end. Improving crop conditions and private estimates of increasing yields point to a larger than anticipated crop. Corn has now posted a major retrenchment and may level out pending more information on the new crop. USDA decided not to permit early out options for CRP land to drop out of the contracts. Current quotes on the southern plains are 60 over the September contract. Corn is now pricing into most rations at $11.50 cwt.