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CME: Live Cattle Futures Lower on Wednesday

19 July 2013

US - Live cattle futures were lower on Wednesday on worries that softer wholesale beef prices could force packers to reduce slaughter and lower bids on cattle in the coming months, write Steve Meyer and Len Steiner.

The August contract dropped 115 points while Dec and Feb live cattle futures were down 77.5 and 85 points respectively. The choice beef cutout on Wednesday was quoted at $189.44, down $1.03/cwt from the previous close and about 10 per cent lower from its peak in late May.

Last year, beef prices remained under pressure into August as hot weather took its toll on beef demand. While the beef cutout is higher than a year ago, in large part this is due to the rebound in the price of 50CL beef trimmings, now trading more than double year ago levels. Tight spot supplies of fat trim and some foodservice promotions appear to have forced some end users to chase 50CL beef prices higher.

And with packers significantly reducing the supply of 50CL traded on a negotiated basis, short term spot shortages now appear to have a much more significant price response. In the end, however, it is important to keep in mind that the price of 50CL beef last year reflected special circumstances (LFTB, AFA bankruptcy) and the price of 50CL beef was significantly undervalued given cattle prices.

Now 50CL beef prices are more in line with their long term value. But while 50CL beef prices have recovered, the price of other beef cuts, especially middle meats, has pulled back sharply. As we noted a couple of months ago, it is one thing to sell steaks by putting them on sale at the start of the grilling season and it is another to sell them full price in the dog days of summer. Seasonality for now has caught up with the beef market.

Going forward, the market will pay close attention to the results of the monthly cattle inventory survey. Analysts polled ahead of the report indicated that they expect total on feed supplies as of 1 July to be down 3 per cent from the previous year. June inventories were down 3.1 per cent from year ago levels. The number of cattle placed on feed in June is expected to be down 5.1 per cent from a year ago.

Lower feed prices and higher prices for feeder cattle imply feedlots were probably a bit more active although feeder cattle supplies have become more current as placements in Mar - May were about 300,000 head higher than a year ago. Remember that USDA will not report national cattle inventory numbers in July, having discontinued its 1 July survey. This will make it more difficult to properly reconcile the balance sheet for cattle supplies for the year and we will not know until next January about the pace of herd rebuilding or liquidation.

The flow of feeder cattle from Mexico has declined sharply and we think the impact on feedlot supplies in June was significant.

Based on the average of analysts estimates (-5.1 per cent) feedlot placements in June were around 1.579 million head, 85,000 head lower than a year ago. Imports of Mexico feeder cattle in June, based on the weekly trade statistics, were 39,839 head compared to 112,863 head a year ago.

So the reduction in Mexico feeder cattle imports alone accounts for a 73,024 head decline in placements. Feeder cattle imports from Canada are about 2000 head higher than a year ago. Cattle marketings in June are currently expected to be down 5.3 per cent from a year ago. Keep in mind that there were 20 marketing days in June 2013 compared to 21 days in June 2012.

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

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