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CME: Cattle Markets Remain Volatile

30 October 2015

US - Fed cattle futures were up the daily permissible limit yesterday following reports of higher prices paid in cattle cash markets, as well as further gains in the beef cutout, write CME analysts Steve Meyer and Len Steiner.

The USDA 5-market weighted average price yesterday was quoted at $137.03 on a relatively large volume for this early in the week.

This follows notably lower quotes the previous two days, fueling hopes that maybe packers capitulated and decided to pay up to secure supplies.

Cattle markets remain particularly volatile as market participants debate the outlook for beef demand going into the holidays as well as front loaded cattle supplies.

The latest cattle on feed report showed that total on feed supplies are up modestly compared to a year ago and it also showed that the supply of cattle that have been on feed for more than 120 days is still about 13 per cent higher than last year. So for the moment, futures will continue to take their cue from cash prices, which is why we saw the big jump yesterday following lower prices in the first two days of the week.

Packer margins were quite strong in September and early October but the recent upswing in cattle prices has pinched those margins. Packers also are struggling with poor by-product values, which now are at the lowest level of the year. As a result, packer slaughter has once again slowed down.

We estimate steer/heifer slaughter this week at 443,000 head, 4 per cent lower than a year ago. Bull and cow slaughter is expected to be 111,000 head this week, 3.5 per cent lower than a year ago.

Despite these cutbacks in slaughter, the amount of beef coming to market will be only modestly lower from a year ago as cattle carcass weights continue to move higher.

We will get an update from USDA on carcass weights for week ending October 17. The last number USDA reported on steer weights pegged them at an all time record high of 928 pounds.

It is likely that weights are close to 935 pounds at this point so the cutbacks in slaughter (remember fed slaughter was running at 460,000 head in early Oct) could push weights even higher as we go into November.

So where do cattle prices go from here? As we noted earlier, the volatility in the marketplace shows that market participants are all over the place on this point.

Those that hold a more bearish view of the market point out to the dramatic gains in carcass weights as evidence that feedlots remain behind in marketings and cannot sustain their buy and hold strategy.

The slowdown in slaughter could further compound the problems relating to over finished cattle. Also, they note that spreads between beef and pork/chicken in retail markets remain quite dramatic and this will tend to negatively impact demand, especially going into the holidays.

The bullish argument for beef, however, is that we are at a different point today than back in September. The problem with the cattle market in September was that packers ramped up slaughter (due to overfinished cattle) at a time of year when demand is normally weak.

With holidays approaching, they note that both retailers and foodservice operators will be more active and willing to bid on beef. Interesting to note that both chuck and rib primals made strong gains yesterday. Packers likely need the cutout to gain another $10-15 to justify fed cattle bids for December in the high 140s.

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