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CME: Fed Cattle Supplies Tighten

12 September 2012

US - The nearby October live cattle contract jumped 135 points yesterday as ongoing strength in the cash cattle market buoyed expectations for beef and cattle prices going into Q4, writes Steve Meyer and Len Steiner.

Supplies of market ready cattle are reportedly tight and feedlots continue to be reluctant sellers despite record high feed values.

Feedlots placed significantly fewer cattle on feed in March and April and this has contributed to the limited supply of cattle available for marketing in August and September. Placements in March and April were a combined 400,000 head or 10.6% lower than the previous year. And this is for feedlots with capacity of +1000 head of cattle. Smaller feedlots likely placed even fewer cattle on feed given tight supplies of feeder cattle last spring, increased financial strain and ongoing uncertainty going forward.

Indeed, the supply of fed cattle coming to market has been tracking well below 2010 and 2011 levels for much of the summer and it is expected to continue in October and November.

End users remain particularly concerned about the availability of product in Q4, especially for items that see strong seasonal demand going into the holiday season. High quality steak items have been particularly strong, in part because end users are accumulating more freezer inventories as a hedge for the holiday demand.

This has helped prop up the market and it has contributed to the surge in cattle prices. But, there is always the danger that the expectation of high prices into the holidays and early buying could sap some of the demand.

Foodservice demand generally tends to be more stable as restaurants cannot quickly go and change their menu items.

They can introduce specials but for the most part, they will maintain a number of core items on their menus. Also, the consumer expects to see high quality beef items as part of their dining out experience. Restaurants can change portion sizes but that strategy has its limits. Retail demand for beef should be a source of concern as they tend to be more flexible in what features they run and how they promote protein items. This is particularly the case given the sharp break in pork prices, which could see more retail ads focusing on pork and other proteins.

The general state of the economy also is a source of concern. Markets will pay close attention to the actions of the Federal Reserve and whether another round of bond buying will spur economic activity.

The problem is that if the US economy is caught in a liquidity trap, the FED actions will have limited impact. At least for the moment, the problems in Europe have been backstopped by the action of the European Central Bank and German courts. The bullish case for US beef hinges both on the performance of the US economy as well as the global economic recovery. In this scenario, US demand holds up while beef exports improve, both due to a weaker US dollar and a more confident global consumer.

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