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CME: Bearish View of Cattle Market Prevails After Cattle on Feed Report

26 April 2016

US - It is hard to say the words bullish and cattle market in the same sentence these days, write CME analysts Steve Meyer and Len Steiner, discussing the USDA's latest Cattle on Feed report.

Fed cattle futures collapsed in the last few weeks and June futures are now under $115/cwt. They were over $131/cwt in mid-March.

The monthly USDA feedlot survey showed that March 2016 placements were 4.6 per cent higher than a year ago.

Analysts on average expected placements to be up 7 per cent, with some calling for placements to maybe be in the double digits.

A couple of things may have played into the smaller placements. First, feeder imports were down 20 per cent in March (see DLR 4/21).

Second, fed cattle futures declined sharply in the second half of March, which may have impacted the outlook for feedlot profitability in late summer and early fall.

Marketings were reported up 7.1 per cent from a year ago, in line with analyst estimates and consistent with slaughter trends. The big increase in marketings reflects the additional marketing day. If we adjust for the additional day, marketings are up less than 2 per cent from last year.

Total on feed supplies as of April 1 were 10.853 million head, 0.5 per cent higher than last year. Keep in mind, however, that this is in operations with +1000 head capacity. Lower feed costs and demand for custom feeding may have brought more smaller feedlots into the mix.

For some reference, it is good to revisit the difference between the monthly feedlot survey vs. the January 1 total cattle inventory.

Takeaway: While the survey results were a bit more bullish than expectations, we are not sure it is enough to change the bearish view of the current cattle market.

With plentiful protein supplies, anaemic beef export demand and sticky retail prices the market is now encouraging the feeder to accelerate sales, pushing prices down in the process.

This market dynamic may overwhelms the signals from this specific report. However, one thing that does stand out from the report is that feedlots are quickly becoming more current.

The supply of cattle on feed +120 days is now down 6.3 per cent from last year. Saturday slaughter was 31,000 head this week and some expected packers to run heavy Saturday slaughter into May.

Currentness is something that feedlots struggled with last year and it may be what finally helps set a more stable floor under prices going forward.

Cold Storage: The supply of beef, pork and poultry in cold storage at the end of March was 2.235 billion pounds, 0.7 per cent lower than a year ago and 1.2 per cent lower than the previous month.

In four of the last five years March inventories increased from the previous month. Only in 2014 inventories were down. The fact that inventories declined should be seen as positive for prices going into the high demand spring period.

Total beef in cold storage was 467.0 million pounds, 3 per cent lower than the previous year and 0.5 per cent lower than the five year average. Beef inventories declined 5 per cent compared to the previous month and they are now 10 per cent lower than just two months ago.

The backlog of fat trim has been cleaned up and lower imports also have contributed to the reduction in beef refrigerated stocks. This may be viewed as supportive for beef prices going into Memorial Day.

Total pork inventories at the end of March were 614.2 million pounds, 8.7 per cent lower than a year ago and now 0.3 per cent lower than the five year average.

March inventories also were down 2.4 per cent from the previous month, in line with the normal drawdown for this time of year, helped in part by an early Easter (lower ham inventories).

Pork belly stocks were down 4.8 per cent from last year but inventories of pork ribs are up 27 per cent and inventories of pork loins were up 13 per cent. Probably one of the more supportive items in the report was the inventory of pork trim, down 35 per cent from last year and 23.5 per cent lower than the five year average.

Hog slaughter has been relatively high in Q1 but trim markets appear to be very current and this has likely been the reason for the sharp price escalation in pork trim values the last two weeks. The price of 72CL pork trim is now almost double year ago levels.

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