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CME: Fed Cattle Futures Trading Lower Again

02 December 2015

US - Fed cattle futures traded lower again yesterday, even as winter weather was expected to impact key feedlot locations, write Steve Meyer and Len Steiner.

There was some expectation/hope that winter conditions would be viewed by futures traders as bullish for fed cattle prices but there is still plenty of bearish sentiment percolating through the complex.

As we noted in our report yesterday, one point of concern is that fed cattle weights are moving up again after briefly pulling back in October.

Feedlots face steep losses on the cattle they have on feed and they are looking to maximise the pounds they put on them.

Front end cattle supplies are some of the heaviest we have seen in recent years and holding cattle on feed longer further exacerbates the situation.

We calculate that as of November 1 the number of cattle that had been on feed for more than 120 days was 3.4 million head. This is 17 per cent higher than what it was on November 1, 2014 and 25 per cent higher than on November 1, 2013.

In 2012 front end supplies were a bit more similar to what we see today but current inventories are about 6 per cent higher than that year as well.

In the last few months, we have seen that fed cattle placements have skewed heavy. As we place heavier cattle on feed and then hold them on feed longer, there should be little surprise that those cattle are dramatically heavier by the time they are available for marketing.

In the last four reported months, placements of cattle over 800 pounds are up 220,000 head compared to the same period a year ago while placements of cattle under 600 pounds are down 190,000 head.

What is needed to get more current is a faster marketing pace but that has been tough given that packers are having difficulty move boxes, especially end cuts and ground beef.

The choice cutout normally moves higher in late November and early December but so far the seasonal increase has been much smaller than expected. There is little incentive for the packer to chase cattle given the weakness in boxed beef prices.

There is speculation that we may/will see an improvement in prices for end cuts and ground beef in January. Indeed, this is what we saw in 2014 and 2015.

However, there is one key difference that we need to keep in mind. Per capita supply availability or consumption in the first quarter of 2016 is expected to be notably higher.

Often people look at per capita consumption as a measure of demand but in reality it is a supply measure. It simply reflects the amount of beef available in the domestic market in a given quarter.

In 2011 and 2012, per capita availability in Q1 was a little over 14 pounds per person. In 2013, the supply declined to 13.7 pounds and then in 2014 and 2015 it was down to around 13.1 pounds.

Retailers looking to replace holiday features with more regular fare (such as ground beef, chucks and rounds) had to compete more aggressively and in the process ran up prices. This year the supply situation does not appear as tight.

In addition, retailers have significantly cheaper meat protein available, both in terms of pork (loins, ribs, trimmings) as well as cheaper chicken.

Foodservice foot traffic also is showing some weakness relative to what it was in 2014 and 2015. While the restaurant index was higher in October, the foot traffic indicator is barely growing.

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