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CME: Analysts Discuss Data on Forward Contracts in Cattle Markets

02 June 2016

US - While there is broad recognition, and some discussion, about the role that marketing agreements and forward contracts play in the cattle market, there is a lot of data available that does not get much coverage, write Steve Meyer and Len Steiner.

Here we discuss the latest information available as well as references to USDA reports that those interested can consult regularly going forward.

Much of the detail on the supply of cattle that packers have contracted for future delivery can be found in report LM_CT153 (google it). The report consists of four parts.

Part one breaks down the supply of packer owned cattle that was processed in the previous week. For week ending May 29 the supply of packer owned cattle coming to market was 14,401 head.

We make the somewhat safe assumption that these are fed cattle (not cows/ bulls). Steer/heifer slaughter last week we estimate at 477,000 head, implying packer owned cattle made up about 3 per cent of total slaughter. In the last 12 months, packer owned cattle have averaged about 4.5 per cent of total fed slaughter.

The second part of the report (section B) breaks down the number of cattle by the way in which they were marketed. Keep in mind that the Mandatory Price Reporting system captures most, not all, cattle that are slaughtered in a given week.

The top chart shows how the supply of cattle reported in the LM_CT153 report compares with both total cattle slaughter and fed slaughter.

As you can see the supply is fairly consistent in recent years, accounting for 88 per cent of total fed slaughter and 72 per cent of total slaughter in the last reported week.

The point is that the numbers in the report capture the overwhelming number of cattle marketed and thus are a good representation of where the market is.

As for how cattle are marketed, the latest week shows that 60 per cent of cattle (251,222 head) was sold on a formula basis.

The cattle sold on this basis rely on market discovery that is accomplished via the negotiated trade, futures prices or boxed beef prices. The formula will often have a base price determined as per above and then premiums and discounts given specific carcass characteristics.

The number of cattle traded on a negotiated basis last week were 103,075 head, 25 per cent of the total reported slaughter while forward contracted cattle were a total of 50,615 head, 12 per cent of reported slaughter.

The third part of the report drills deeper into the structure and pricing of the forward contracted cattle.

The idea is to provide increased visibility as to the supply of cattle that has been contracted forward for specific months as well as the basis levels for the cattle contracted.

The second chart shows that there is a distinct seasonality in terms of the supply of cattle contracted forward.

This makes intuitive sense as fed supplies are generally plentiful in the summer months and demand slows down. As a result packers do not see the need to forward contract as many animals. However, forward coverage increases for the fall.

The bottom chart shows the supply of cattle contracted forward as of May 29 and compares to what forward coverage looked like at the same time in the last three years. The basis levels booked on forward contracted cattle are presented both as a range and a total weighted average.

The report thus gives both forward volume and pricing information to buyers and sellers.

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

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