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CME: Fed Cattle Futures Lose Ground

30 March 2016

US - Fed cattle futures have lost ground in the last few days following a pretty impressive rally that started in late February, Steve Meyer and Len Steiner wrote.

The nearby April contract gained about $12/cwt (+10 per cent) between mid February and mid March.

It has given back about half of those gains as market participants question both the resilience of beef demand and, as Bill Simmons would often say on ESPN, the testicular fortitude of feedlot operators in a somewhat different supply environment.

First a couple of thoughts on the supply side. The last cattle on feed report showed that the supply of cattle on feed in operations with +1000 head was 10.770 million head.

This supply was about 0.8 per cent higher than in 2015 and 0.5 per cent higher than in 2014.

If you were to look only at this number it would be hard to comprehend why fed cattle futures are now discounted by 10-15 per cent. But even as the total supply of cattle on feed is only marginally higher than in 2014 and 2015, the supply of cattle that have been there for more than four months is relatively high.

Based on the last inventory report, +120 day cattle on feed supply was 4.152 million head on March 1, 3.4 per cent more than last year and some 17.4 per cent higher than two years ago.

Further adding to the pressure is the fact that fed cattle weights continue to run well above year ago and five year average levels.

Normally steer weights drift lower into the spring but a relatively mild winter has had a very limited impact on fed weights. The last USDA report that breaks down steer, heifer and cow weights was surprising (this is USDA report SJ_LS711 published on Thursday).

It showed steer weights for week ending March 12 at 896 pounds (dressed weight), 25 pounds (+2.8 per cent) higher than the previous year. Average cattle weights for that week were 834 pounds (this includes heifers and cows, which are lighter), 2.2 per cent higher than a year ago. This is the equivalent of 12,000 cattle added to the weekly kill.

Weekly cattle slaughter normally moves up in the spring. The top chart shows weekly steer and heifer slaughter.

Last week slaughter fed cattle slaughter was 428,000 head, just 0.5 per cent higher than the previous year (but this may have been impacted by Easter). We expect slaughter this week to be 434,000 head, 4 per cent higher than the previous year.

Slaughter should climb in the 480-490,000 head range by late April and early May. How aggressive packers are in trying to source cattle will depend in large part on retail/ foodservice demand.

Part of the reason why futures rallied in March was because of the rapid gains in the price of boxed beef and particularly the price of fat beef trimmings. This brings us to the point we made at the start - the resilience of beef demand going into April and May.

Part of the problem for beef packers last year was the very high ground beef price at a time when pork and chicken prices were weak (remember pork cutout was 65 cents last April).

Packers found a lot of resistance in selling boxed beef at a price that would justify cattle values in the mid 150s. The result was a dramatic decline in cattle slaughter for the spring and summer, eventually leading to an oversupply of cattle in the fall - and a price correction.

This spring retailers are finding that ground beef is on sale. And they are looking for products to feature that can support their sales dollars. The price of 81CL coarse ground beef last night was $182.78/cwt, 25 per cent lower than a year ago. Chucks and rounds are down as well.

It would be reasonable to expect that we will see more ground beef features in late April and all the way into Memorial Day weekend. And while middle meat values have cooled off a bit, they still remain quite strong.

Post Easter business will be a critical early test and based on how well business develops in the next couple of weeks may determine the trajectory of fed cattle prices in late spring and summer.

Daily Livestock Report - Copyright © 2008 CME. All rights reserved.

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