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CME: Fed Cattle Futures on W20/2017 Close on Firm Note

23 May 2017

US - Fed cattle futures closed last week on a firm note, with the August contract up 140 points and the Jun-Aug spread now at the lowest point since last November, reports Steiner Consulting Group, DLR Division, Inc.

While there is a lot of uncertainty about the summer beef market, the sharp rally in both beef and cattle prices so far has forced market participants to rethink the outlook through the entire futures curve.

Robust beef demand going into Memorial Day has made it possible for packers to push up spot beef prices. We will run our estimated beef and pork packer gross margins later today when the comprehensive cutout numbers come out but, based on early estimates, it looks like beef packers have managed to climb in positive territory again.

We estimate that steer and heifer slaughter last week was 1 per cent higher than a year ago but the decline in carcass weights implies beef pounds coming to market likely declined year over year. Keep this in mind when you look at the summary table (below), which still shows beef production up 1 per cent from last year.

We are using the reported preliminary USDA data, which include somewhat inflated weight numbers (they are estimated not actual) and they also include cow/bull meat in the calculation. The point of debate going forward will be the rate at which retailers respond to the sharp run-up in beef prices and opt to feature other proteins at the expense of beef.

This is never a straight up calculation as the retailer also is looking to maintain foot traffic and also needs to preserve revenue targets, which are a lot harder to hit if you replace a $7 item with a $3 dollar one.

The comprehensive beef cutout report will provide an update on forward beef sales as well as beef export sales. USDA also will tell us a bit more about what packers have been doing to bolster their forward cattle coverage.

The last report showed that packers have added forward coverage more aggressively. Cattle bought for August deliveries last week stood at 209,4365 head, up 23 per cent from four weeks ago and the largest forward position for August (for this time of year) in five years.

Packers also added significantly to their November and December positions, increasing them by 67 per cent and 52 per cent, respectively. Packers buying more cattle for future delivery may provide them with a bit more cushion but it does not solve the fact that feedlot inventories remain extremely current and will likely stay as long as fed slaughter stay near current levels.

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

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