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CME: Feeder Cattle Demand Shows Improvement

08 August 2016

US - Feeder cattle futures have been on a tear recently and yesterday almost hit $150/cwt before retreating, write Steve Meyer and Len Steiner.

Still the nearby contract settled higher for the day on Friday and it is up $7.5/cwt (+5.4per cent) for the week.

Demand for feeders shows some improvement given gains in fed cattle values and lower corn prices.

Current feeder futures hold a nice premium over what fed/corn values imply, evidence in our view that markets are counting on a) continued expansion of the cattle herd (fewer heifers available for feeding); b) a large negative basis for corn (already a reality in some areas and could get worse in the fall); c) further growth of the farmer-feeder sector as producers look for ways to add value to their crops (this is a corollary of point b.); and a reflection of above average pasture conditions.

There is some debate in the industry at this point about the pace of herd rebuilding. The best benchmark for tracking herd expansion, in our view, is the USDA national cattle inventory survey.

In the past this survey was done twice a year, thus providing markets with the opportunity to adjust their forward estimates and better reflect supply conditions on the ground.

This year USDA discontinued the July survey due to budgetary constraints, leaving market participants to guess as to what to expect come next year.

For us one way to track the herd rebuilding progress (but an imprecise way to be sure) is the ratio of female slaughter to overall cattle slaughter. During times of herd rebuilding, producers send fewer females to market as they try to keep as many productive beef cows in the herd as possible and also bring in more heifers in order to expand.

The chart shows both the weekly ratio and a 52 week moving average. The weekly ratio is meant to give you a very current read although it is also quite seasonal given the seasonal trends in cattle slaughter.

The 52 week moving average coincides with the broader herd rebuilding trends. The ratio of female  slaughter to overall slaughter for the first seven months of the year was 43 per cent compared to 45 per cent for the same period a year ago.   

Now this number may be skewed a bit because of the very large pace of slaughter this spring, bringing fed steers to market in a more timely fashion than a year ago.

Last year the ratio for the period Aug‐Dec was 43 per cent and we expect (adjusting for what has happened so far this year) that the ratio for the remainder of the year will be around 45 per cent to 46 per cent.

This implies a larger number of beef cows and heifers coming to market than a year ago and likely a slowdown in the pace of herd rebuilding. Still, it is important to recognise how strong herd rebuilding was in late 2014 and 2015, a pace that is hard to sustain for very long.

So for the year our expectation is for the ratio to be a little under 45 per cent. This will be a bit higher than a year ago (again implying a slowdown in herd rebuilding) but it is still one of the lowest ratios in the last 25 years.

There is a fairly strong relationship between the female/total slaughter ratio and the increase in January 1 inventories.

The second chart shows the level of January 1 inventory as implied by the female slaughter slaughter ratio vs. the actual (shaded area).

A ratio of 44.7 per cent would imply a January 1 cattle inventory increase of 2.4 per cent. Lower feed costs, good pasture conditions and a reduction in feeder imports all should contribute to further expansion of the US cattle herd, which also may explain why fed futures hold such a discounted structure for next summer.


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