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Live Futures Supported By Wholesale Beef

12 December 2013

US - Live cattle futures appeared to get some support on Tuesday from higher wholesale beef prices. The expectation is that packers could raise some of their cash bids on cattle in order to fill spot needs for product going into the holiday season, write market experts Len Steiner and Steve Meyer.

More broadly, however, wholesale beef prices have not performed as well as some expected earlier in the fall. Indeed, December futures a few weeks ago traded as high as $134.7/cwt.

This was immediately after the mandatory price reporting resumed and there was some pent up demand from end users that held off buying in the absence of a consistent pricing mechanism. Since then, however, the choice and select beef cutout have declined and this has negatively impacted packer margins and their willingness to bid on cattle.

Supplies of market ready cattle have not been as tight as what the market was pricing earlier in the fall. Last week there was some speculation, and we also got some reports, that packers would cut back on kills given slower than expected sales.

The slaughter numbers for the week painted a different picture. Fed cattle slaughter last week was 492,000 head, up 2.4 per cent compared to the same period a year ago. So while there is talk about beef demand being weak, the issue at this point appears more related to the supply availability rather than demand.

If anything, beef demand seems to be doing relatively well. Overall fed beef supplies for the week were somewhere around 3 per cent above year ago levels (slaughter is up 2.4 per cent while steer and heifer carcass weights are still running about 0.6 per cent above last year).

The choice beef cutout last week averaged $202.65/cwt, +4.2 per cent above year ago levels. As an aside, for those that are new to the Daily Livestock Report, we quote the weekly supply and price numbers each Monday morning for the past week.

At this point, market participants continue to calibrate future pricing expectations based on the flow of cattle to market. 

We do know that the supply of cattle on feed continues to run below year ago levels, and it has been quite limited at least since the summer. The issue is when those cattle will be marketed and that is when it helps to look at the details of the cattle on feed report, particularly the weight breakdown. Last summer feedlots placed significantly fewer cattle on feed, as lower feed costs and better pastures allowed producers to return to a more normal placement pattern.

Also, an ever shrinking calf crop and increasing demand for female calves to go into the cow herd has further reduced placements. Having said that, keep in mind that last summer placements were skewed towards heavy steers. For the period Jun - Aug, total cattle placements were about half a million head (-8.6 per cent ) lower than the same period the previous year.

However, placements of cattle over 700 pounds, were down just 21,000 head. The bulk of the decline was in the number of calves under 600 pounds, down 332,000 head. So while current fed slaughter is slightly above year ago levels, we should see a notable decline in cattle availability during the Feb - Apr window.

Beef prices normally are weak between mid January and mid February (see chart above) as consumers demand declines following the holiday meat fest. At this point, the fed cattle supply declines have yet to kick in but once they materialize, and assuming beef demand holds steady, we should see the choice cutout approach $210 going into the spring.

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