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CME: Futures Run out of Steam

30 November 2012

US - The rally in live cattle futures appeared to run out of steam this week as market participants worry about the pace of beef sales and wholesale beef prices going into the year end holidays, reports CME Group.

The nearby live cattle futures contract (Dec12) rallied by almost 500 points between the beginning of the month and into Thanksgiving. However, since then futures have been drifting lower, closing down 50 points from the previous close and have given up about 200 points since the beginning of the week. So far the price of the beef cutout has failed to keep pace with live steer prices (see chart below).

The USDA quoted the choice beef cutout on Wednesday afternoon at $195.7/cwt, $0.8/cwt or 0.4 per cent higher than the previous week. More importantly, the choice cutout is currently trading less than 1 per cent above year ago levels while the select cutout is currently priced at almost exactly the same level as a year ago.

And while packers are getting about the same amount of money for the beef they sell as they did a year ago, they have to pay a bit more for the cattle they buy. The five market average cash live steer price (USDA) was quoted last night at $127.3/cwt, about 2 per cent higher than a year ago.

Steer and heifer slaughter in the last couple of weeks has been running above year ago levels. This probably helped cattle prices to rally as packers bid on more cattle but it also brought a bit more product to market that packers then had to scramble to sell.

Some parts of the carcass are doing better than others, which is not unusual at this time of year.

The price of the loin primal is currently running about 6 pre cent above year ago levels on good demand from foodservice establishments going into year end holidays.

On the other hand, the chuck primal has been flat while the brisket and short plate are down 7 per cent and 10 per cent vs. year ago respectively.

These two primals account for about 12p per cent of the value of the carcass and have limited the normal seasonal up that we see at this time of year. Short plates should benefit from export demand but they have generally been negatively impacted by the weakness in the 50CL market (down 32 per cent vs. year ago).

We will wait for the weekly export data that will be published today and provide you with a read on beef exports tomorrow. We continue to wait for a decision from Japan to allow all cattle 30 months and younger into the country. While a large portion of US cattle already meet the current Japanese requirement of 21 months or younger, the increased burden of segregation and plant certification makes it difficult for US packers to ship to Japan.

By making the rule consistent with that of many other markets, US packers should be able to offer more product into Japan. Items such as plates and chucks should be the ones to benefit the most.

Also from a seasonal perspective, the performance of the round cuts has been generally disappointing. The chuck and round primal will be key for the market in Q1 of next year.

Futures continue to price a significant premium for Q1 cattle but the cutout will have to follow, otherwise a correction will be in order. Based on current cattle futures, we would need to see the cutout above $205.

The choice cutout has had trouble breaking past the $200 level this year but tight cattle supplies and the risk of winter weather will keep the premium in place for now.

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

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