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CME: Feedlots Need to Remain Current

16 May 2016

US - Fed and feeder cattle futures spent much of the day in the red yesterday even as boxed beef prices continued to gain ground and cash prices for fed cattle notched big gains compared to the previous week, write Steve Meyer and Len Steiner.

USDA cash trade reports noted $6 gains from last week in the Texas panhandle, $7 gains in Nebraska and a $5 increase in Colorado.

The down day in futures could be an illustration of the old adage “buy the rumour, sell the fact.” But we also think it reflects market trepidation about getting too bullish about cattle given ample supplies of competing proteins and the possible slowdown in beef buys once Memorial Day needs are covered.

It is clear that retailers are back in force looking to book last minute supplies for the upcoming holiday. The big question for the market in the short term is whether beef demand will be sustained after the holiday.

Market participants will likely pay close attention to both the pace of slaughter in the next two weeks and the price of boxed beef. That will set the tone for the market going into the summer months.

The recent jump in fed cattle prices recently has erased much of the margin cushion that packers enjoyed in April and early May. Cutout values need to stay firm, or even gain a bit more to stimulate cash fed cattle bids.

The increase in fed cattle slaughter in the last four weeks has been significant but not unprecedented. Indeed, it is the kind of activity one would expect at this time of year.

The chart shows steer+heifer slaughter only and compares it to the last few years. It is important to keep an eye on 2013 and 2014 levels.

Feedlot inventories as of April 1 were 0.5 per cent higher than a year ago, 0.6 per cent higher than in 2013 and 0.3 per cent lower than in 2013.

But only focusing on total on feed supplies is insufficient. One needs to pay close attention to the supply of cattle that have been on feed for some time and thus will be available to come to market in the next 30-60 days.

This is the supply that feedlots will draw upon when they offer cattle. As of April 1, the supply of +120day cattle was estimated at 3.945 million head, 4 per cent lower than in 2015 but 7.6 per cent higher than in 2014.

We estimate that as of May 1 that supply will be 3.749 million head, 4.9 per cent less than last year but 8.4 per cent higher than in 2014 and just 1.4 per cent under 2013 levels.

The point is that fed slaughter needs to maintain its current pace in order to keep feedlot supplies current as we go into the summer months.

Last year packers were struggling with negative margins and slowed down slaughter in June, July and August. By September feedlots found themselves with a glut of extra heavy animals.

Are feedlots now more current in their marketings? No doubt, one needs only look at the latest USDA steer weight number, which was pegged at by USDA on Thursday at 868 pounds, down 28 pounds from mid March and now just 3 pounds higher than last year. BUT, keep in mind that these numbers are for weights two weeks ago.

We built a model that uses recent information to project where weights are for this week and it shows that steer weights have stopped going down.

It is imperative for feedlots to maintain the current flow of cattle, after all this is the time to sell beef, in order to maintain currentness through the summer. If they do that, maybe there is hope to bring back the fall and winter premiums that the market normally enjoys.

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

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