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CME: Fed Cattle Prices Still Languishing

17 February 2016

US - There has been some surprise (and disappointment if you are in the feeding business) that fed cattle have failed to gain traction in the last couple of weeks.

Despite winter weather and a stronger than expected cutout, cash fed cattle prices have languished and they are now a bunch of dollars lower than the high 130s feedlots were asking a couple of weeks ago.

On Monday USDA quoted the 5-Market live steer price (all grades) at $130.17/cwt. For the last five business days, the weighted average price has been $131.48/cwt.

There is a different dynamic in the fed cattle market and there are a lot of thoughts/opinions as to what has changed.

Some argue that increased volatility has benefited the packer, with feedlots uncertain where prices will be at any given point and thus more likely to blink.

But then there are others that argue that the packer has adjusted after a few years of struggling with poor margins. Daily slaughter is quite a bit smaller than it used to be and small changes in available supply tend to have significant impact on prices.

Fed slaughter for the most part is trending slightly above year ago levels. The big drop and then spike (see chart) was due to weather disruptions.

In the last four weeks fed cattle slaughter has averaged 433,000 head/week (includes our estimate for this week) compared to 427,304 head/week during the same period last year.

The 1.3 per cent increase in weekly steer/heifer slaughter may appear a bit odd given total on feed inventories that are reported under year ago levels.

But it really is not when considering that the supply of fed cattle that have been on feed more than 120 days is about 10 per cent higher than last year. Also consider that the monthly USDA cattle on feed survey only captures the supply in feedlots that have a capacity of +1000 head.

The semi-annual cattle inventory survey captures the total supply on feed and it revealed that the total on feed number as of January 1 was up 1.2 per cent from a year ago.

As the LMIC commentary points out, there has been a resurgence in the number of smaller feedlots now that feed costs have declined and there is more demand for custom feeding and locally grown beef.

Keep that in mind when looking at feedlot numbers. So where does the beef/cattle market go from here?

So far the choice beef cutout has followed the normal seasonal trend, with prices getting a boost in January as retailers replenished the meat case following holiday features.

Normally beef prices stay weak through the end of February before end users start preparing for post Easter needs. Processors become more active, readying for the start of the grilling season.

Foodservice business normally gets better as spring arrives. It is interesting to note what items have lost the most ground relative to a year ago. The choice cutout last night was quoted at $215.29/cwt, about $23 lower than a year ago.

More than a third of the decline is due to lower chuck prices and we think this is due in part to problems with the ground beef market. Retail ground beef features this spring could quickly fix that.

Lower short plate and brisket prices reflect the weakness in export demand. Loin prices are weaker but they will firm up in March and April (15-20 per cent). Restaurant business trends bear watching here, with higher disposable incomes a key driver.

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